Today the Hong Kong Monetary Authority (HKMA) announced the launch of Project Ensemble, a new wholesale central bank digital currency (wholesale CBDC) initiative. The wholesale CBDC will enable interbank settlement for tokenized commercial bank money (tokenized deposits).
The wCBDC Sandbox will be used to trial the settlement of tokenization use cases, including tokenized green bonds such as the recent $756 million issuance by the Hong Kong government. Payments will involve tokenized deposits. Other applications would include settlement for:
- carbon credits
- tokenized aircraft instruments
- electric vehicle charging stations
- electronic bills of lading
- treasury management.
The HKMA envisages the possibility of a new financial market infrastructure (FMI) to bridge the gap between tokenization offerings and money. There was no mention of a ‘Unified Ledger‘, the BIS concept that combines different types of regulated tokenized money and assets onto a single ledger. The BIS doesn’t appear to be involved in the latest project, but the HKMA plans to engage other central banks.
“Project Ensemble will provide fresh impetus to our vibrant financial industry and reinforce our forefront position in tokenised money and assets,” said Mr Eddie Yue, Chief Executive of the HKMA.
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Hong Kong’s central bank plans to form a wCBDC Architecture Community. This will comprise banks, digital asset players, technology firms and its existing academic CBDC Expert Group. HashKey Group, the parent of one of Hong Kong’s authorized crypto exchanges, said it will provide input for the project.
“This fundamentally improves the efficiency and speed of interbank and cross-border settlements, reducing settlement times and complexity, and enhancing the interaction between fiat currencies and digital assets,” said Dayong Zhang, CCO of HashKey Group.
Other tokenization initiatives
HSBC, Hang Seng Bank and Ant Group conducted tokenized deposit trials in 2023 as part of the HKMA Fintech Supervisory Sandbox. HKMA has several other initiatives involving tokenization. These include mBridge for cross border payments, Genesis for green bonds and Dynamo for SME financing. Additionally, HKMA has retail CBDC trials for the eHKD.
Hong Kong is the latest central bank to explore a solution involving tokenized deposits. Brazil was one of the first when it rejected a retail CBDC because of its successful Pix payment system. Instead, it opted for a wholesale CBDC (DREX) to support tokenized deposits, using the on-chain money to settle blockchain-based securities transactions. The European Central Bank is exploring a wholesale CBDC and other DLT payment options. The Bank of Korea has a similar initiative to the HKMA.
Unlike stablecoins, tokenized deposit transactions have two legs. Firstly, one person might transfer a bank (A) deposit token to another. The recipient may not use the same bank, so the received token (A) would be swapped for the token of its own bank (B). Now bank B holds a bunch of bank A tokens. This is where a wholesale CBDC is useful, so Bank A can redeem the tokens by paying Bank B with the wholesale CBDC.
