The HKMA introduces a new data sharing initiative, reported on the central bank digital currency initiative, and outlined regtech plans.

 By Simon Hawkins, Kieran Donovan, and Kenneth Y.F. Hui

The fifth annual Hong Kong Fintech Week conference kicked off with speeches and panels from both Hong Kong and international regulatory representatives, in addition to key market players. Topics explored ranged from the impact and complications of technology and big data to notable technological trends that have emerged as a result of the pandemic.

In particular, the Hong Kong Monetary Authority (HKMA), as outlined in its press release, have implemented various policy initiatives. Three key takeaways are as follows:

  1. The CDI initiative would allow banks to perform more precise and objective credit assessments

 Eddie Yue, Chief Executive of the HKMA, introduced a new data sharing initiative, the Commercial Data Interchange (CDI), in his opening keynote, introducing a new strategy that will see the HKMA launching its own platform to facilitate open banking instead of relying on the private sector.

Currently, data is scattered across different sectors and entities, and moves between data providers and banks via bilateral connections without standardized protocols. Today’s infrastructure also makes it difficult for banks to access or verify the validity of data.

As it becomes difficult for banks to collect holistic information from customers about their business or financial activities, customers, especially small and medium-size enterprises (SMEs), will also suffer consequences. In particular, if banks are unable to perform credit assessments based on up-to-date business data, they may instead require collateral such as property before making a loan.

Another area of concern is trade finance, as it is often hard for banks to access the trade and customs records of importers or exporters. This can make it difficult for banks to conduct credit assessments, and for companies to get trade finance loans.

In light of these challenges, the HKMA will introduce the CDI, a new market development initiative:

  • The CDI aims to establish a consent-based common standard for data owners to share their digital footprint with banks through data providers (such as utilities companies and payment gateways). Under CDI, each bank and data provider will have a single connection to this interoperable platform, and with customers’ consent, banks can have direct, efficient access to a substantial body. This would enable banks to offer more suitable services to customers, perform more precise and objective credit assessments and address the difficulties mentioned above.
  • The HKMA has also made clear that principles of customer consent and data security are to be upheld with regard to the CDI at all times. The CDI will be subject to rigorous governance that will include consumer protection measures.
  • The HKMA has also announced in its press release that it is conducting a proof-of-concept study of the CDI in collaboration with banks. The study focuses on using trade-related data to facilitate the trade finance application process and is expected to be completed by the end of 2020. The next phase, related to other commercial data sources that could facilitate alternative credit scoring conducted by banks, will begin in 2021.
  1. The HKMA is studying the application of CBDC to cross-border banking

In his opening keynote, Mr. Yue also provided a general recap of the inefficiency, cost and opacity of the correspondent system today, and outlined recent work by the Bank of International Settlements on the application of technology to improve cross-border banking.

  • The HKMA is conducting a joint study with the Bank of Thailand on the potential of a blockchain-based central bank digital currency (CBDC) network, with a view toward more efficient cross-border payments.
  • The HKMA has already developed a proof-of-concept prototype that enables real-time cross-border funds transfers on a peer-to-peer basis. In the next phase of the study, the HKMA and the Bank of Thailand will explore business-use cases such as cross-border trade settlement and capital markets transactions, and will bring banks and large corporations into trials to test the network using actual trade transactions. Findings are expected to be delivered in the first quarter of 2021.
  • In the future, HKMA will undertake further studies to extend the architecture to a multi-CBDC platform. Leveraging on this platform, e-wallet service providers may be able to offer retail-use cases such as remittances and cross-border payments for travelers within the region.
  1. The HKMA sets out its regtech vision and initiatives

 Arthur Yuen, Deputy Chief Executive of the HKMA, said in his speech that the HKMA envisions Hong Kong (i) becoming a global leader in regulatory technology (or regtech) by 2025; (ii) extensively adopting regtech in the banking sector in the next few years; (iii) becoming a breeding ground for growing regtech solutions for financial institutions; and (iv) emerging as a hub for nurturing regtech talent.

Mr. Yuen also announced the launch of a white paper entitled “Transforming Risk Management and Compliance: Harnessing the Power of Regtech,” outlining a number of initiatives that the HKMA will undertake to accelerate the adoption of regtech by the Hong Kong banking sector. The white paper is based on findings from a survey of banks and regtech providers, interviews with industry stakeholders, benchmarking against other jurisdictions and an analysis of Hong Kong’s regtech progress.

In summary, the white paper sets out that:

  • The benefits of regtech, including enhancing risk management quality and reducing costs.
  • Challenges to the wider adoption of regtech in Hong Kong, including budgetary constraints, lack of available solutions, lack of appropriate talent, concerns about the risks of applying regtech solutions and lack of awareness of the potential value of regtech.
  • To address these challenges, the HKMA will focus on five core areas: (i) boosting awareness of banks in regtech, (ii) promoting solution innovation, (iii) increasing regulator engagement with the ecosystem, (iv) developing the talent pool in Hong Kong, and (v) sustaining the adoption of regtech. Specifically, the HKMA aims to, among other things:
    • Create a regtech knowledge hub to share related content with the Hong Kong banking industry
    • Communicate its regtech expectations to the banking industry through guidance materials
    • Host targeted regtech events to raise the industry’s awareness
    • Organize regtech competitions and challenges to bring together investors, financial institutions, and technology firms to innovate together
    • Develop a regtech skills framework for different roles to accelerate the adoption of regtech
    • Develop a Regtech Adoption Index (RAI) to measure banks’ regtech adoption propensity and preparedness.