Hong Kong to trial wholesale CBDC in interbank settlements

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Following early successes with asset tokenization, the Hong Kong Monetary Authority (HKMA) has announced plans to proceed with a wholesale central bank digital currency
(CBDC) to further its ambitions.

The central bank said the new CBDC project will support the development of a “tokenization market” in the region via experiments with innovative financial market infrastructure.

Dubbed Project Ensemble, the project will double down on new use cases for a wholesale CBDC, focusing on settling interbank transactions with tokenized deposits. Hong Kong is no stranger to tokenized deposits, with the HKMA having previously experimented with the concept with Ant Group, Hang Seng Bank (NASDAQ: HSNGF), and HSBC (NASDAQ: HSBC).

Operating as a sandbox for the central bank to experiment with wholesale CBDC for tokenization, the project will explore other financial market infrastructure (FMI) solutions.

Hong Kong has been exploring the concept of a wholesale CBDC since 2017 but has opted against rolling out the offering for commercial use. Experts proposed that the success of Project Ensemble may force the HKMA to proceed with a “live issuance” of a wholesale CBDC.

“Project Ensemble will provide fresh impetus to our vibrant financial industry and reinforce our forefront position in tokenized money and assets,” said HKMA CEO Eddie Yue. “We welcome global talents and industry players to come to Hong Kong and be part of this very exciting tokenization journey.”

The HKMA will attempt to settle tokenized real-world assets like carbon credits and green bonds using CBDCs under the project. Apart from providing support for the burgeoning tokenization ecosystem, Project Ensemble is billed to bridge the gap between tokenized real-world assets and money in transactions.

Aware of the need to form uniform industry standards, the HKMA says it will create an “Architecture Committee” to guide the use of wholesale CBDCs in tokenization. The committee will comprise leading commercial banks, blockchain technology, and the previously launched CBDC expert group.

Central banks have their eyes peeled on tokenization

Global central banks are eyeing tokenization use cases for their CBDCs in addition to cross-border and local settlement functionality. Deputy Governor of the Banque de France Denis Beau disclosed that central banks may lose their relevance if they fail to explore asset tokenization for CBDCs.

“If we do not adapt central bank money to this evolving landscape, meaning if central bank money cannot be used to settle tokenized transactions, industry participants may turn to alternative settlement assets, such as stablecoins,” said Beau.

In line with the call, the HKMA is leading the charge with multiple tokenization projects and
will roll out a playbook to distribute non-regulated tokenized products.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Finding ways to use CBDC outside of digital currencies