Hong Kong / Thai central banks unveil cross border digital currency results
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Today the Hong Kong Monetary Authority (HKMA)
and the Bank of Thailand (BoT) announced their findings from a cross border
central bank digital currency (CBDC) initiative. The aim was to experiment
with circumventing the correspondent banking network, allowing direct
payments between banks. Hence this was an institutional or wholesale CBDC
experiment. Two commercial banks in Hong Kong and eight in Thailand
participated in the research.
The two central banks will continue their
joint research, including exploring business cases and connectivity to other
platforms. This is a continuation of Thailand’s Project Inthanon research and
Hong Kong’s LionRock project.
The report follows yesterday’s announcement
that six central banks and the Bank for International Settlements plan to
collaborate on CBDC research.
Typically, in correspondent banking, to make
cross border payments, a bank will establish accounts at other banks in
numerous jurisdictions. The downside is it ties up funds and is a time-consuming
administrative burden. For those jurisdictions where it doesn’t have a
banking relationship, payments will be routed via another bank, a
correspondent bank.
By exchanging CBDC tokens, there is no need
for the paying bank to have a bank account at the destination or use a
correspondent bank. Bank to bank payments become real-time peer-to-peer
payments. In the banking world, this instant settlement is referred to as
Payment versus Payment (PvP).
Edmund Lau, Senior Director at the HKMA,
commented about how the solution helps to solve the “pain points of low
efficiency and high costs in traditional cross-border payments.”
As with other central bank research
initiatives, the banks plan to share their results with the rest of the
central banking community.
The technology used was R3’s Corda, and the
tech partners were CryptoBLK, which has worked on previous iterations of
Project Inthanon and Hong Kong consultants CH & Co.
For domestic payments, every country usually
has a Real-Time Gross Settlement system (RTGS). So one of the first questions
is, how will the cross border CBDC fit in with this? There are two potential
models.
The ‘cross-participation’ model allows foreign
entities to access to the domestic payment system. The downside of this model
is that correspondent banking is likely to persist.
The other ‘asset expansion’ choice is to
enable the domestic RTGS to support transactions in both local and foreign
currencies. The challenge is for central banks to keep control over their own
money supply. Alternative options include setting up a new multi-currency
RTGS, or a subset of that, a segregated multi-currency corridor between two
countries. The latter was the chosen route for the trial.
So, in this selected case, domestic payment
systems do not allow access to foreign banks. Each central bank issues its
own wholesale CBDC for domestic use. For cross border transactions, each
central bank issues (and destroys) Depository Receipts (DR). So a local bank
will request an amount of CBDC to be converted to DRs to use in the corridor,
which involves the central bank destroying some CBDC and creating the exact
same amount of DRs.
The corridor network allows inter-bank
payments of DRs by central banks in either of the currencies.
In addition to the primary payment mechanism,
the research also allowed for different types of foreign exchange, liquidity
management, and regulatory compliance.
The conclusion was that settlement efficiency
was improved because it involves real-time settlement without correspondent
banks. Liquidity is more efficient because CBDC tokens replace Nostro
accounts, which usually tie up assets.
From a compliance perspective, transactions
are reported in real-time, and it reduces the commercial bank reporting
efforts.
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