Hong Kong’s Blockchain Trading Platform

The Hong Kong Monetary Authority (HKMA), the autonomous Chinese territory's de facto central bank, is set to launch a live blockchain trade finance platform by September.

The joint venture by HKMA and Chinese company Ping An Group aims to reduce paperwork and risk in the financial market.

Background

Blockchain is the world's leading software for digital assets. It is a decentralized and distributed digital ledger of cryptocurrency. Transactions are verified by a network of unrelated computers, based on software and stored in immutable blocks, secured by hashing.

Don & Alex Tapscott, authors of the book Blockchain Revolution have noted blockchains cannot be corrupted. They wrote, “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance (BFT). Decentralized consensus has therefore been achieved with blockchain. The first blockchain was conceptualized in 2008 and was created by an entity going by the pseudonym Satoshi Nakamoto for the Bitcoin cryptocurrency.

Blockchain technologies are poised to dramatically reshape the world of manufacturing and, in the process, render obsolete the existing international trade regime. This has already occurred in the case of 3D printing, the application of internet-of-things (IoT) devices to shipping and logistics, and  artificial intelligence.

In May 2018, HSBC and ING Group said they performed the world’s first trade finance transaction using a single blockchain platform. The platform, Corda, was developed by New York-based blockchain consortium R3.

Analysis

Hong Kong has now developed a proof-of-concept for a Distributed Ledger Technology (DLT) or Blockchain-based platform for financial trade. HKMA is working on the project with Deloitte and a consortium of banks including the Bank of China (Hong Kong), Australia and New Zealand Banking Group, Hong Kong and Shanghai Banking Corporation and Standard Chartered Bank (Hong Kong).

The proof-of-concept platform for banks, buyers and sellers, and logistics companies demonstrates the application of DLT in digitising paper-intensive processes. The use of DLT reduces the risk of fraudulent trade and duplicate financing and improves the transparency of the transactions.

"The aims of the platform are to reduce frauds related to trade finance and double financing, and therefore lead to increased credit availability and lowered financing costs in the long run. This may in turn help small and medium-sized enterprises (SMEs) gain access to trade financing," the HKMA explained.

HKMA released a white paper on DLT last year which would cover three key areas: mortgage loan application, trade finance, and digital identity management. Transparency and efficacy of the platform would be facilitated through a number of ways, such as the use of smart contracts in open trade (whereby buyers and sellers authenticate purchase orders (POs) while allowing banks to read the PO and financials) and tracking of transactions with information on all involved parties.

A 2017 survey by the Asian Development Bank found the global trade finance gap (the amount of unmet demand for trade finance) was $1.5 trillion, 40% of which originated from the Asia-Pacific region. Market participants and governments are investing heavily in emerging technology like blockchain in order to service clients more effectively.

Hong Kong’s Securities and Futures Commission (SFC) has stepped in with more definite regulatory policies this year, taking action against local crypto exchanges, ICOs and warning the public about potential risks related to investments in the crypto market. Moreover, Hong Kong continues to nurture financial, cross-border initiatives powered by blockchain, steadily gaining a reputation for being an important international blockchain hub.

A group of European banks, including Nordea, Deutsche Bank, Rabobank and HSBC, recently completed a series of cross-border financial trades through a blockchain platform called we.trade developed by tech giant IBM.

“The next major milestone is to link up with other trade platforms in other jurisdictions to further facilitate cross-border trades,” said Howard Lee, deputy chief executive of the Hong Kong Monetary Authority (HKMA).

Counterpoint

As the network architecture for blockchain relies on nodes which record transactions, a private blockchain for commodities trading may grant more-central positions in the network to established trading partners over new entrants. Blockchain operators must also decide how to resolve the problem of lost identification credentials, particularly for systems that manage physical assets.

Assessment

Our assessment is that by integrating blockchain technology into the realm of finance and trade, Hong Kong stands at the vanguard of change from the Fourth Industrial Revolution. We believe that paper-based transactions have limited the capacity of the financial markets and will soon be replaced by data-driven technology.