Hong Kong Monetary Authority Launches 'Project Ensemble' Sandbox to Support Institutional Experimentation with Tokenization

The initiative also involves an experimental wholesale CBDC (wCBDC) to enable interbank settlement between the tokenized deposits of banks.

Hong Kong’s monetary authority has launched a new institutional sandbox for experimenting with tokenization of traditional securities and real world assets (RWA).

The initiative, announced by the Hong Kong Monetary Authority (HKMA) on Friday, also includes an experimental wholesale central bank digital currency (wCBDC) to enable interbank settlement between the tokenized deposits of banks.

Four banks are providing the tokenized deposits: HSBC, Standard Chartered (Hong Kong), Bank of China (Hong Kong) and Hang Seng Bank. Other direct participants are Microsoft Hong Kong, Ant Digital Technologies (ADT) and Hashkey Group.

The Securities and Futures Commission (SFC) is partnering with HKMA for one of the four trial categories relating to fixed income and funds, where BlackRock and Franklin Templeton are amongst the ‘non community’ participants.

“The Sandbox is an example of how innovation and regulation can go hand in hand to blaze a new path for our financial markets,” said Julia Leung, SFC CEO.

“As two major architects of Hong Kong’s financial markets, the SFC and the HKMA share the same vision and dedication to future-proofing the city’s financial system through innovative market infrastructure.”

Unlike stablecoins where payments involve a single token transfer, a tokenized deposit is a digital twin. Hence, a token transfer from the client of one bank to another also requires the banks to settle with each other in their off-chain books. That can be done with a payment using the conventional RTGS system, or ideally with a wholesale CBDC.

“The use of wCBDC for interbank settlement of tokenized deposits will be tested during the Sandbox,” HKMA stated.

“This will pave the way for the future development of a two-tiered settlement system for tokenized deposits, comprising on-chain settlement for customer transactions and off-chain settlement for interbank transactions.”

Liquidity, supply chain and green finance use cases

Another Sandbox application category is for liquidity management, including repo and treasury management. Ant International (not ADT), is collaborating with StanChart and HSBC to develop a global liquidity management solution.

The goal is to use Ant’s Whale platform for treasury management to help the banks to exchange their tokens. Ultimately, this aims to support real-time 24/7 cross border payments.

“The solution will enable the banks to integrate their liquidity pools and provide optimal liquidity to their clients in various jurisdictions,” HKMA explained.

“The use of wCBDC will enable the banks to settle their token trades on a net basis, thereby reducing the overall settlement amount and optimizing liquidity.”

Supply chain finance is an area to be explored in the Sandbox. One use case involves issuing electronic bills of lading (eBL) on the Global Shipping Business Network (GSBN) blockchain infrastructure.

“These eBLs will then be tokenized by Ant Digital Technologies to support the movement of funds for trade finance using tokenized deposits, with interbank settlement using wCBDC,” HKMA added.

The ICC Digital Standards Initiative is a participant in another trade related use case.

The fourth application area is for green finance, which attracted the most external participants (8) including local stock exchange HKEX.

Apart from these four areas, the HKMA said it would “continue to engage with the community to potentially add more application categories.”

Plus, it’s exploring collaborating with the BIS Innovation Hub on one or more themes.

The HKMA is also taking part in the European Central Bank wholesale DLT settlement trials.

“The trials aim to test the interoperability between the Project Ensemble platform and the Banque de France DL3S blockchain for wCBDC,” HKMA stated.

“The successful completion of these trials will pave the way for the future development of a two-tiered settlement system for tokenized deposits, comprising on-chain settlement for customer transactions and off-chain settlement for interbank transactions.”

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