Hong Kong - Thailand - State-Backed Digital Currencies Advancing To Final Stages.
Legal News & Analysis - Asia Pacific - Hong Kong - Thailand - Regulatory & Compliance - Banking & Finance
21 December, 2019
Among the numerous current plans across Asia for government or state-backed institutional digital currencies, Hong Kong and Thailand are on the verge of rolling out a digital token for use on a cross-border payment platform that will enable transfers of funds between the two economies significantly quicker and more efficient.
Using a two-tier system – not dissimilar to that in development by the People’s Bank of China (PBC) – evolved from the joint venture signed this year between the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand, the first tier will see a token issuance to the Hong Kong banks involved in the pilot scheme, with the second tier involving the distribution of tokens to their corporate customers for use in bilateral trade.
With blockchain technology at the core of the platform, companies will be able to settle wholesale payments between them directly, overcoming the need for correspondent banks and intermediary layers. Likewise, banks in the two regions will be able to use “payment-v-payment” foreign exchange settlement far more easily than at present (currently being limited to US$ exchange only).
Further details of the pilot and the proof-of-concept study will be announced in the first quarter of next year, according to Edmond Lau of the HKMA. Mr. Lau has, however, indicated that the HKMA sees the prospect of a central bank digital currency for retail purposes in Hong Kong is limited at present, given the proliferation of retail payment services currently being used effectively.
China to launch “DCEP” digital currency
In parallel, recent announcements in China have led to much interest in the prospect of the country issuing a central bank, state-backed digital currency soon. The PBC launched a programme to look into digital currency innovation back in 2014 and in 2017 set up a specific research institution to develop a viable format – one by-product of which is that the PBC has so far applied for some 74 patents around enabling technology.
In August 2019, a senior PBC representative announced that the virtual currency was “almost ready” for release. This was in stark contrast to China’s general policy regarding cryptocurrencies, which banned ICO’s in 2017 and prevented Bitcoin (or equivalent) / Yuan trading. This latter announcement therefore piqued considerable interest. When coupled with President Xi Jinping’s pronouncement in late October to senior members of the inner Central Committee that China should “embrace digital finance” and invest deeply in integrating blockchain and other technologies such as AI, big data and IoT, this led to speculation that the launch of the digital currency was imminent.
However, subsequent clarifications have emphasised that there is no current timetable for the launch, citing further work being done on anti-money laundering capabilities.
Notwithstanding this note of caution, China is clearly accelerating its drive towards a digital currency capability – conscious there are a number of other countries working to similar objectives (such as Singapore, Canada and Switzerland). To this end, Shenzhen, on the southern China border with Hong Kong, has been selected as a pilot area for trialling the digital currency technology, given the proliferation of blockchain and other advanced technology companies there.
The PBC calls the new unit of currency “DCEP”, or digital currency for electronic payment. Unlike other cryptocurrencies, it would be fully state-guaranteed, single-currency (yuan)-backed through PBC reserves. It is not intended to replace cash (it is simply a digitised yuan), but China is already a society that is much nearer to being “cash-less” than many others. The DCEP will also operate on a two-tier system, with the first tier being a centralised issue to existing authorised wholesale banking institutions and the next layer being dispersed through digital wallets to enable retail usage between businesses and individuals, on a “wallet-to-wallet” basis.
Apart from offering greater transaction speed, security and efficiency, it seems one of the Chinese government’s objectives for DCEP is the centralised control it should enable – not least, as a type of “private, permissioned” blockchain structure, it enables visibility on all transactions. Anticipating that this may lead to concerns regarding privacy and anonymity, the stated government goal is to maintain a balance between “controllable anonymity” and an ability for the authorities to better address “money-laundering, terrorist financing, tax evasion, on-line gambling and other electronic criminal activities”, as well as being able better to identify and control money outflows from the country.
To this end, it is anticipated that KYC regulation will apply to inputs to wallets but “wallet-to-wallet” transactions thereafter would be “pseudo-anonymous”: in other words, discrete, subject only to the centralised system exercising its access rights to the database. However, the continuity of cash will preserve normal anonymity for those who still wish it.
The fact that China passed its new encryption law, although much wider in application than digital, only a few days later could be seen as gearing up for the time when the DCEP is ready for launch.
For further information, please contact:
John Koh, Director, Osborne Clarke