Hong Kong, Thailand launch a two-tier token in digital currency prototype to accelerate cross-border trade financing

By Dorothy 12/5/19 8:04 AM

The monetary authorities of Hong Kong and Thailand are ready to launch a two-tier token, part of the process of creating a prototype to transfer money across borders between the two economies using financial technology, or fintech, the South China Morning Post reported on Wednesday.

Similar to the system developed by the People’s Bank of China, the two-tier system, which is a step forward in the LionRock-Inthanon Project, established in November based on fintech cooperation between HKMA and Thai Bank Lan in May.

Hong Kong Chief Executive Carrie Lam (left) and Thai Deputy Prime Minister Somkid Jatusripitak (right)

According to the Hong Kong Monetary Authority (HKMA) spokesman, the Project LionRock-Inthanon is the first tier of the prototype, involving the issuance of tokens to Hong Kong banks participating in the pilot program.

The LionRock project is run by the Hong Kong Monetary Authority (HKMA) to study the benefits and risks of CBDC, including study evidence on the concept of encrypted CBDC and debt securities issued into a single DLT system.

Led by the Bank of Thailand (BOT), Project Inthanon explores the feasibility of DLT to strengthen Thailand’s financial infrastructure as well as encourage collaborative learning among stakeholders.

The two-tier system involves banks distributing tokens to their business customers to settle wholesale payments with other banks or with other companies.

The use of blockchain-powered tokens is expected to accelerate the pace of currency payments between the two economies – with $ 19.6 billion in bilateral transactions last year – helping companies and the bank has a more competitive exchange rate for Hong Kong dollars and Thai baht.

Edmond Lau, a senior executive of HKMA, said it was also a different use case than the digital currency being developed by the central bank of China. And capital focuses on replacing coins and banknotes in circulation to support retail transactions. According to Lau, the LionRock project focuses on streamlining transfer and cross-border payments between banks and companies.

Lau said in a discussion at Hong Kong fintech Week last month that, “because we have a lot of retail payment services (credit card), debit cards and (other types) recommended, so the prospect of issuing a central bank digital currency for retail purposes in Hong Kong is very limited”.

HKMA’s cross-border payment platform in the “depositary receipt corridor network,” uses blockchain, which allows companies in both Hong Kong and Thailand to directly address wholesale payments to each other. Because blockchain technology overcomes shortcomings with the existing agency bank model, which involves multiple intermediaries often leads to payment delays.

Currently, HKMA is also cooperating with HSBC and ZhongAn Technologies International, having a virtual bank license through its subsidiary. And it is the only online insurance unit of Hong Kong agent, ZhongAn Online P&C, on the digital currency project.

With their Inthanon Project, the Bank of Thailand is also working on its own central bank digital currency, also involving banks such as HSBC and Standard Chartered. Half a dozen Thai banks include Kasikorn Bank and Krungthai Bank.

In the first quarter of 2020, Lau said HKMA and the Bank of Thailand would publish more details of their evidence research. The joint research project, called the LionRock-Inthanon Project, was signed in November between HKMA and the Bank of Thailand to study such cross-border payments. The goal is to facilitate HK dollars and Thai payments versus payments (PvP) between banks in Hong Kong and Thailand. It is an extension of a wider agreement signed in May.

The MoU was signed between Mr. Norman Chan, CEO of HKMA and Mr. Veerathai Santiprabhob, Governor of BOT, in Basel. Under the MoU, HKMA and BOT can collaborate to introduce innovative businesses, share information and experience and joint innovation projects. A potential collaboration under consideration by the two agencies is a joint research project on the Central Bank’s Digital Currency (CBDC), whereby the two agencies can apply knowledge and experience that they have gained from their own CBDC studies, which are HKMA’s Project LionRock1 and BOT’s Inthanon2 Project.

Currently, Hong Kong interbank clearing is the interbank clearing joint venture owned by HKMA and the Hong Kong Banking Association. It offers PvP on Thai baht but is limited to US dollar exchange. Payment Vs Payment is a forex payment mechanism. It guarantees that the transfer of one currency only occurs if the conversion of another currency also takes place, will be final and irrevocable.