Five takeaways from the HKMA-MAS trade-finance DLT deal
Why HKMA’s announcement about teaming up with MAS for a trade finance blockchain is a big deal, what could go wrong, and what’s to come.
The Hong Kong Monetary Authority hit the turbo button at Hong Kong FinTech Week by unveiling a deal with Monetary Authority of Singapore to jointly promote trade finance via a blockchain.
It was one announcement among several meant to drive home the message that Hong Kong’s authorities “get” fintech and are promoting the city as an innovation hub.
The raft of announcements is more than a marketing ploy. It’s a big deal – but some big questions remain, too. Here are DigFin’s five takeaways.
- Governments and banks learning to share
“We can’t change a paper-based system on our own. We’ve achieved a breakthrough with distributed-ledger technology, however. We firmly believe the time has come for trade finance to move into the digital era.” –Norman Chan, CEO, HKMA
“Any effort to digitize will require all parties to cede some control to a decentralized system.” –Vivek Ramachandran, head of growth and innovation for commercial banking, HSBC
One reason blockchain solutions have struggled to get past proof-of-concept stages is that everyone wants to develop a system for their own profit – whether that’s revenues for banks, or sovereign authority for governments. But blockchain is all about decentralized networks. You’ve got to share the benefits – and your authority – to enjoy the benefits. This deal shows that Hong Kong and Singapore’s governments, and a few key global banks, are willing to cede some control for a bigger, long-term gain.
- An Asian voice arises
“This interface is likely the first of its kind in the world, in the application of distributed-ledger technology in solving a centuries-old problem around the inefficiencies of a paper-based financial system...Once developed and implemented, other trading partners around the world will be able to plug into it. This is important market infrastructure...” –Norman Chan, HKMA
“This will facilitate trade in the Belt-and-Road corridor...DLT digitizes letters of credit and, for open accounts, creates a commons hared repository...from a client’s perspective this makes transactions in the One-Belt-One Road trade corridor easier.” –Gautam Jain, global head of digitization and client access for transaction banking, Standard Chartered Bank
During the 1997-98 Asian financial crisis, attempts at a regional response failed in part because there was no “Asia”, just a lot of small markets plugged into a financial infrastructure built in the West. This has always been the case.
But now Hong Kong and Singapore, the region’s financial leaders, are cooperating to set new standards in the world of decentralized software-based trade finance protocols.
Moreover, China’s Belt-and-Road initiative, a sort of Marshall Plan for our era, seeks to bind Eurasia in a tighter web of commercial connections (that lead back to Beijing), but it’s hard to trade with corrupt tinpot Stans. Enter blockchain, creator of trust!
Bottom line: Asia is already the center of gravity when it comes to global trade, in terms of assembly. The powers that be want to embed this trend, and now the region’s leading entrepôts want to write the new financial rules, too. Trump and Brexit? Bonus points.
- Regulators force innovation.
“There have been lively discussions in the fintech community on the possibilities around DLT, but not enough focus on deployment and implementation.” –Norman Chan, HKMA
“This is the first time I’ve seen an innovation initiative led by governments, not the private sector.” –A senior trade banker speaking to DigFin after Chan’s announcement
Try explaining this to your pals in Palo Alto: the fusty regulators are forcing the banks to get off their butts and innovate. DLT is infrastructure. It’s the digital equivalent of China building airports, Hong Kong’s subway system, and Singapore’s congestion pricing system.
This isn’t foreign to the West – think of the way California drives emission standards for automobiles – but the mantle of development leadership is increasingly found in Asia. Not all bankers thinks DLT will work in trade finance, but they might have to change their tune if the regulators signal this is what they want.
What this announcement also does? It forces all the talkers about blockchain’s governance and liability issues to take action and come up with answers. Because DLT is here.
- What could possibly go wrong?
- Global banks’ local branches don’t yet have a way to connect to this H.K.-Singapore DLT. One for the to-do list.
- Having the governments and the banks on board is vital – but so is attracting other members of the trading ecosystem, such as shippers, freight forwarders and trading entites big and small. Connecting requires investment.
- No details about who is actually building this DLT were revealed. We’d like to know. Vendor risk is a thing.
- Certain players say they believe in decentralized software, but still want control. Good luck with that.
- Too many participants mistake this project for a new I.T. project they can slot into their old-fashioned risk models.
- Collaborative projects need a governance model that strikes the right balance between scalability, aligned incentives, and agile decision-making. Can this be achieved? Who’s responsible if there’s a security breach? How do you ensure the data put onto the blockchain is valid? How do you protect confidentiality?
- How do you differentiate between ‘nodes’ on the system versus users just using its infrastructure to transact?
- Who makes the rules regarding moving data or transactions on and off the blockchain? Who’s responsible for safeguarding assets in a cold wallet, or for recovery of lost private keys?
- In the event of a dispute, which legal jurisdiction is involved? (Because in a project like this, neither Hong Kong nor Singapore can dictate whose body of law applies.)
- How will DLT work for trade in countries where digital signatures are not recognized?
- More is to come.
“Trade finance is the first project in our cooperation...We asked banks to join common platforms, so we ourselves had to show leadership.” –Bernard Wee, executive director, MAS
“Hong Kong and Singapore should work together to promote and develop fintech. There are a few areas in which we can collaborate...” including infrastructure, cyber-security, KYC and mutually recognized sandboxes. –Roy Teo, head of financial center development, MAS
“Human sacrifice, dogs and cats living together, mass hysteria!” –Bill Murray as Peter Venkman in “Ghost Busters”
Yes, for veteran observers of the Hong Kong-versus-Singapore game, this is an alarming development. Journalists with nothing better to write about will be gnashing their teeth and rendering clothes. Fear not, the dynamism of dueling financial centers will continue. But when dealing with decentralized assets, expect more frenemy-type relationships. It’s disruption!
But what else could be around the corner? Not just in terms of ministerial MOUs, but in things that will change the markets? Here are two hints:
“Beyond trade finance we’re looking at central banks issuing digital currency.” –Bernard Wee, MAS
“In the longer run, think about taking [open account data] downstream to investors as an investible asset class. If we can demystify trade finance for your average investor, we can create access to more funding, open the market to more financiers, and broaden the scope for risk appetite.” –Michael Lim, group head of trade and supply chain, ANZ.