HSBC and Chinese tech company Ant Group have successfully implemented tokenised deposits for advanced treasury solutions in Hong Kong in the latest in a series of digital trade settlement developments by HSBC.
According to the bank, the initiative, carried out under the Hong Kong Monetary Authority’s (HKMA’s) fintech supervisory sandbox, showcases the level of banking capabilities in the region. It will continue to use tokenised deposits and other financial innovations to enhance and simplify treasury management for clients.
HSBC had already been exploring the concept, participating in 2022 in an industry group that conducted proof-of-concept experiments using tokenised deposits for payments and settlement. Working with the Alipay developer for three months, it moved from an existing API-based, real-time solution to native atomic settlement using tokenised deposits on Ant Group’s blockchain-based TMS.
HSBC’s collaboration with Ant Group began with HSBC DLT settlement utility’s (HDSU’s) connection to Ant Group’s blockchain-based TMS. It now says it is working with its corporate clients to explore ways in which blockchain and tokenisation may help unlock efficiencies.
The HDSU connects its core banking infrastructure to its clients’ business blockchain networks, according to Vincent Lau, global head of emerging payments, global payments solutions at HSBC. “HSBC sees tokenised deposit as an opportunity to bring about treasury management efficiency,” he says.
In September, the bank announced it had piloted its first blockchain-based digital payments platform, which enables property developers to simplify and automate payments to their suppliers and vendors for major real estate developments. The blockchain-based workflow and payment solution digitalises workflow tracking processes, enhancing operational efficiency, governance, transparency, and reducing project turnaround time.
The initiative coincides with Singapore’s efforts to digitalise the real estate industry and may replace traditional payment methods with blockchain-based solutions.
Blockchain and Web3 technologies are key to digitalising industry collaboration and value movement, improving liquidity and corporate treasury management efficiency, and the latest testing forms part of its wider efforts to “help shape the future of money”, according to Mr Lau. He says the bank has also been working with regulators and industry partners, exploring the concept of tokenised deposits.
Since 2020, the bank has been providing payments and settlement services to Ant Group’s blockchain-based treasury management platform, Mr Lau says. “This partnership provided an excellent opportunity to apply what we have learned from the various digital-currency experiments we’ve been involved in, for example with Project mBridge and Project Nexus, to real-world use cases.”
HKMA’s fintech supervisory sandbox allows HSBC and Ant Group to experiment with the concept of tokenised deposits in a risk-controlled environment. The bank works in parallel with various teams within HKMA, including its fintech facilitation office and the Banking Supervisory Department, to review and consider the right regulatory framework for banks to provide tokenised deposit-based services. Currently there is no universal definition nor generally accepted treatment of tokenised deposits from a regulatory perspective.
Mr Lau suggests blockchain may provide a more secure and easier-to-access single source of truth of payments and funding level in real time for corporate treasury teams. “Tokenisation may also provide an opportunity to embed information in the financial flow, which can improve reconciliation, and may allow programmability to further automate and streamline treasury processes,” he explains.
HSBC’s involvement in central bank digital currency (CBDC) and tokenised deposit projects underscores its commitment to driving innovation in the financial industry, including participation in Project mBridge.
In earlier experiments, the working group proposed using wholesale CBDCs as a “bridging utility” to support inter-bank settlement of tokenised deposits, and HSBC is working with various central banks to further validate the concept.
Tokenised deposits can help central banks to create more precise use cases that benefit from tokenised government money through a CBDC, while more general-purpose use cases may better be serviced by existing regulated financial institutions in the form of tokenised commercial bank money, says Mr Lau.
Tokenised deposits may allow commercial institutions to bring efficiencies to existing payments and settlement use cases, or innovate new use cases in a tokenised economy, and HSBC is working with various clients in areas including treasury management, trade finance, securities settlement and loyalty programmes. “We are strong believers of co-creation, and we see ample opportunities in tokenised deposit-based settlement capabilities,” says Mr Lau.
This month, the bank announced plans to launch a new digital assets custody service for institutional clients who invest in tokenised securities.
Expected to go live in 2024, the digital assets custody service will complement HSBC Orion, the bank’s platform for issuing digital assets, as well as HSBC’s recently launched offering for tokenised physical gold. Together, these form a complete digital asset offering for HSBC’s institutional clients.
HSBC has also begun working with Abu Dhabi Securities Exchange to develop digital fixed-income securities. If successful, this should pave the way for the introduction of a broader array of capital market use cases in the Middle East.
In a statement, Mohammed Al Marzouqi, HSBC UAE chief executive officer, said the bank is digitalising at scale by adopting new technologies such as blockchain to enable the issuance of digital assets, hold them in custody and make them available for trading. The aim, the statement said, is to help accelerate efficiency and drive new and innovative opportunities for investors.
