Hong Kong blockchain trading deal with seven banks coming in September

Faster mortgage loan applications and added security are some of the upshots of a new upcoming trading platform…

Hong Kong’s central bank, the HKMA, has signed a deal with seven major banks to set up a blockchain-based trade finance platform.

The deal will seek to add speed up mortgage loan applications by digitising mainly paper-based practices, as well as automating frequent processes and adding an extra layer of security to trade finance and identity management.

HKMA is expected to launch a private, permissioned blockchain for each of these areas, with the banks acting as trusted partners. The information on private blockchains is practically impossible to reverse or edit, just as it is on open, public blockchains that record all transactions for cryptocurrencies like Bitcoin.

The banks involved are: Hang Seng, HSBC, the Bank of China, The Bank of East Asia, BOC Hong Kong Holdings, the Australia and New Zealand Banking Group, and Standard Chartered Bank, with Deloitte consulting.

A joint release quoting the HKMA’s Deputy Chief Executive Howard Lee claims the country’s central bank will have the first application live by September.

Lee told Reuters: “The next major milestone is to link up with other trade platforms in other jurisdictions to further facilitate cross-border trades.”

The transparency and escrow abilities available with private blockchains are of serious interest to traditional banks. This is because trading as a whole has moved away from the system of documentary credit, where sellers rely on banks to offer assurance that payment will be made.

Now most trading occurs on an open account basis, where sellers transfer goods directly to buyers without waiting for the intervention of banks. This – while much faster – opens banks up to the risk of fraud and money-laundering because of the lack of third-party confirmation of trades, and the fact that few individuals have access to transaction details.

A proof of concept for the platform has been in the works since October 2017.

HKMA revealed in a 2016 white paper on Distributed Ledger Technology (DLT) that it was looking into how DLT could be used in a variety of banking practices, such as valuing properties for mortgage loan applications.

All blockchains are DLTs, but not all DLTs use the blockchain method of adding blocks of transactions to an immutable chain.

The move marks another split between cryptocurrencies and blockchain. The HKMA, like many other central banks, has been repeatedly forced to deny that it has, or plans to, issue a state-backed cryptocurrency.

In May, the HKMA issued a strong denial that it had released a government-backed cryptocurrency “for investment by the general public”. It warned investors that “the HKMA has never launched and will not launch any such crypto product.”

Of course, there is no route in to these official projects for individual investors. Institutional backers like hedge funds, pension funds and crypto-specific funds with huge amounts of capital behind them can all profit. Individuals with life savings? Not so much.

As one of South East Asia’s major financial centres Hong Kong is home to over 200 banks and trading institutions.

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