Cyberport Smart-Space FinTech 1.0 completes first phase, showcasing value in six key application areas

In May of this year, the Hong Kong authorities launched the e-HKD pilot program at Cyberport. The first phase of the research has recently been completed, and the Hong Kong Monetary Authority has released a report showcasing various use cases of e-HKD, including comprehensive payments, programmable payments, offline payments, tokenized deposits, Web3 transaction settlements, and tokenized asset settlements.

Offline Payments

Current electronic payment transactions still require an internet connection. Despite the high internet penetration rate in Hong Kong, poor signal connections may hinder businesses and users who rely on electronic payments, such as payment terminals supporting credit card or mobile electronic settlement.

Standard Chartered Bank, Giesecke+Devrient, and Industrial and Commercial Bank of China collaborate to store and transact digital Hong Kong dollars through physical and electronic media for offline and online transactions between consumers and businesses. The digital Hong Kong dollars used in the trial are stored through mobile wallets and physical secure elements, enabling offline transactions using near-field communication (NFC) to prevent double spending, ensuring finality in these offline transactions, and allowing funds to be immediately available for subsequent offline transactions.

Tokenized Deposits

Tokenized deposits do not have a universal definition or standard but are generally understood as the tokenization of bank deposits. Although tokenized deposits and digital Hong Kong dollars are conceptually separate, tokenized deposits can be issued without involving digital Hong Kong dollars. However, this study combines the two, exploring how to integrate them into the same ecosystem.

HSBC, Hang Seng Bank, and VISA tested tokenized deposits, with results indicating that tokenized deposits can help consumers and businesses complete transactions involving financial institutions more quickly and transparently, enabling more comprehensive peer-to-peer transaction integration. Tokenization can enhance traditional transaction efficiency, addressing issues such as financial institutions being unable to assist with payments outside working hours, and parties requiring manual tracking for costly reconciliation tasks.

Tokenized deposits can reduce transaction settlement risks, accelerate the settlement speed of large transactions, enhance transaction information security, and provide round-the-clock online services.

Web3 Transaction Settlement

Web3 has its own economic system and ecosystem, including NFTs, DeFi, games, and other decentralized applications (dapps). Digital Hong Kong dollars can act as a bridge between the traditional fiat economy and the Web3 world. By wrapping and cross-chaining digital Hong Kong dollars, they can be integrated with dapps and other blockchain networks to facilitate the smooth inflow and outflow of digital Hong Kong dollars into the Web3 economic system.

In experiments, Mastercard attempts to bring real asset value into the Web3 economic system through RWA. By using wrapped digital Hong Kong dollars, they simulate purchasing NFTs representing real-world assets packed onto the chain. Each NFT represents a digital certificate of the physical asset.

By wrapping digital Hong Kong dollars, their value can securely enter any other non-native blockchain, such as a blockchain or dapp specialized in NFT trading of physical assets, without being restricted by its original digital Hong Kong dollar system.

Tokenized Asset Settlement

Tokenizing assets can help sellers discover more buyers for their assets by dividing and making them more accessible to a broader audience. For buyers, tokenization provides detailed information and transaction history for each asset, increasing trust and providing more information.

Asset tokenization can also represent legitimate rights to assets, such as property deeds, but regulatory adjustments are needed to achieve this.

In their trial, Fubon Bank and Ripple tokenized real estate, offering HELOC loans to property owners in the form of digital Hong Kong dollars. The token representing property ownership is used as collateral by the bank, which provides loans in digital Hong Kong dollars and credits the homeowner's account, all executed automatically through smart contracts.

The current processes for banks are complex and may involve multiple systems. By using tokenized loan models, banks can offer more efficient services to potential property owners, increasing liquidity.

Boston Consulting Group, HKT Payment Limited, and Zhongan Bank experiment with "equity" tokenization, settling loan transactions using digital Hong Kong dollars. By tokenizing these rights, equity can be fragmented, allowing borrowers to borrow from multiple entities.

For borrowers, fragmenting equity allows them to borrow from multiple lenders at different rates, providing secured loans for smaller nominal amounts, creating new markets for loans that banks typically do not handle due to their smaller scale compared to borrowing from a single entity.

For lenders, programmable digital Hong Kong dollars can restrict loans from being used for prohibited purposes, reducing risks and offering lower rates to enhance competitiveness.

Digital Hong Kong Dollars Indeed Have Value

The first phase of the Digital Hong Kong Dollar Pilot Project has made significant progress and proposed areas for future research. The trial has yielded much real data and feedback, highlighting three main advantages of digital Hong Kong dollars: "programmability," "tokenization," and "real-time settlement," demonstrating the authorities' expectations and optimism for digital Hong Kong dollars.

However, the report points out that the Hong Kong Monetary Authority needs to carefully consider the positioning of digital Hong Kong dollars in the Hong Kong currency and financial system, ensuring bank, monetary, and financial stability while understanding their impact on facilitating new product and service transactions. Additionally, research is needed on how digital Hong Kong dollars will interact with traditional payment systems, indicating there is still a long way to go.