Editor's Note: This article is the second article in the "CBDC International R & D Dynamic Analysis" series. Authorized by the author, Babbitt Information is the first to be published.
Former article: Analysis of CBDC's international R & D dynamics (1): Seven giants form a group, "Synthetic Hegemony CBDC" will be born?
I. Traditional cross-border payment is "dragging and long"
The ASEAN region, including 10 countries including Thailand, is Hong Kong's second largest trade in goods and fourth largest trade partner in services. Among them, Thailand's status is very important: it is Hong Kong's ninth largest commodity trading partner. Economic and trade cooperation in the fields of communication technology, consumer products and transportation is very frequent. In 2018, Hong Kong launched the third Economic and Trade Office in the ASEAN region in Bangkok, Thailand, highlighting the importance of ASEAN and the foreign trade between Thailand and Hong Kong.
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However, as recently announced by the Bank of Thailand and the Hong Kong Monetary Authority, the report “Indano Hills-Lion Rock: Using DLT Technology to Improve Cross-Border Payment Efficiency” reports:
"For decades, the pain points of high costs, inefficiencies and settlement delays of cross-border payments have always existed."
What are the “pain points” of cross-border payments?
In Europe in the early 16th century, Francis I of France paid Spain a huge amount of silver coins to redeem his two sons as hostages. The Spaniard spent four months counting and examining silver coins, and found that 40,000 of them were undervalued. War reparations are non-trade, but also involve cross-border payments. At that time, large-value payments were made in precious metal currency, the payer's delivery and security, the time taken by the payee to process, and the losses suffered due to insufficient currency , these risks often existed in that era.
Today's international payment system is certainly much more advanced and faster than hundreds of years ago, but has the risk been eliminated? Consider the following example:
A Thai company T has to pay a sum of money to a Hong Kong company H, but T has a local bank A that only has Thai baht, and A does not have a branch in Hong Kong. T needs to solve two problems: one is to convert the Thai baht into Hong Kong dollars, Is to find a bank that not only handles international exchange business, but also has a business relationship with T's account bank.
Bank B meets this condition exactly. According to the settlement process, the Thai baht is converted into Hong Kong dollars, which is transferred from A to B, and B is remitted to Y branch in Hong Kong, and H opens an account at bank Z, so Y has to convert the received Hong Kong dollars Transfer to Z, the business is not over.
The long settlement process, many participating institutions, and opaque settlement processes are common problems in traditional cross-border settlement businesses, which bring many risks to settlement parties. According to World Bank data, transaction processing fees for cross-border fund transfers The average is 7% of a transaction . It is mainly composed of the following parts:
Source: Bank of Thailand and Hong Kong Monetary Authority report, 2020
It can be seen that current account liquidity accounts for the largest proportion. The correspondent bank B in the above example, as an agency for other small and medium-sized banks' overseas operations, needs to open foreign currency accounts in multiple countries and regions for foreign currency exchange settlement, which places high requirements on the correspondent bank's account liquidity management. In addition, there are risks in terms of supervision, exchange rates, operations, and funds . The above average cost of 7% must be shared among other participants.
The two points are connected, and the straight line is the shortest. Can you get through the various levels of cross-border payment, build a channel to directly communicate with the receiving and paying parties, and handle the business point-to-point ? This is the impetus for the Bank of Thailand and the Hong Kong Monetary Authority to jointly develop the Indanong-Lion Mountain project.
Exploring the blockchain technology channel network
First of all, both the Thai and Hong Kong sides already have a certain R & D foundation in using blockchain technology to explore wholesale CBDC.
The Hong Kong Monetary Authority launched the Lion Rock Project in 2017 and conducted a proof-of-concept for the issuance of CBDC applications. It was concluded that the payment infrastructure in Hong Kong is very mature and effective. It is of little significance to issue retail-type CBDC and may be more suitable for issuing wholesale-type CBDC Used in cross-border payment, realizing cross-border real-time transactions and reducing overall transaction costs.
The Bank of Thailand launched the Indanongshan project in 2018 to study the use of DLT ledger technology to optimize Thailand's payment and settlement infrastructure and enhance the collaborative capabilities of all parties.
Based on the independent research results of the two parties, the Hong Kong and Thai parties jointly launched the use project in 2019.
3. Digital settlement currency shared by the two countries: DR
The main content of the cooperation project is, in short , to establish a corridor network between the wholesale CBDC systems of both parties , so that participating banks in the local network can enter this corridor network, and use DR to directly handle cross-border payments and foreign exchange transactions with each other.
The roles of the Bank of Thailand and the Hong Kong Monetary Authority : they are responsible for the issuance and redemption of tokens in the local CBDC system; they are jointly responsible for liquidity management within the channel network (including transaction queue management, congestion management, liquidity supply of different currencies, etc.) .
The technical details of the implementation of cross-border payments and foreign exchange transactions in the channel network can be found in the interpretation of the report by Liu Yanbu , a public account. The author's concern is a deposit value certificate ( Depository Receipt (DR )) created by the project, which can be understood as the settlement CBDC shared by the two sides in the channel network. Banks participating in the channel network must first Having a local CBDC and applying to the channel network for conversion to DR, the value can only be transferred within the channel network.
The concept of DR appeared in the first phase of the Jasper project in Canada, which is Canadian wholesale digital currency CAD-coin. Banks participating in the settlement of the CBDC system use the Canadian dollar to exchange 1: 1 for each day during business hours, and then enter the market. At the end of business, the balance will be exchanged back to the Canadian dollar, and the central bank will withdraw CAD-coin for destruction. This type of CBDC only exists during business hours, and the exchange of fiat currency according to 1: 1 has no impact on the central watch. The use of DR for payment settlement is the full and irreversible transfer of currency claims of the central bank it represents, so there is no credit risk.
The DR used in the Hong Kong-Thailand channel network is the same and can only exist during business hours. The difference is that it can be converted into a local currency DR or a foreign currency DR in the channel network. The current interest rate, quotation and off-chain arrangements provided by the network provide three mechanisms . Solve foreign exchange and trading issues.
4. Will the CBDC Consortium spawn a new currency union?
Historically, to this day, there are a number of monetary unions, such as the Latin Monetary Union, today's Eurozone, the Central African Monetary Union, and the West African Monetary Union. The emergence of these mechanisms has played a role in reducing the costs of exchange, settlement and settlement between different currencies and maximizing the effectiveness of capital utilization. However, due to the solidification of the interest structure and the obsolescence of the rules, it cannot adapt well to the speed of development of modern society. Therefore, emerging powers will inevitably find opportunities to play games with them.
Compared with other creations of human civilization, the change of currency is relatively slow, but it has not changed several forms for thousands of years. Today's digital currency is a rare opportunity. As more and more central banks participate in the development of CBDC, the direction and path of discussion are becoming more and more diversified. Recently, we saw that Canada and Singapore cooperated to conduct a cross-platform docking test of CBDC. BIS led six central banks to conduct research and development of cross-border payments for CBDC. The ECB organized a dozen European countries to conduct a proof-of-concept for the EU chain. The development of CBDC, DR, a common digital settlement currency, may be loaded with more and more information and functions. On the one hand, there is indeed a practical need to solve cross-border payments. On the other hand, it is taking advantage of the currency's digital revolution to seize the opportunity. , Re-establish the rules, and form a profit structure under the new currency form.