Blockchain is the Key to Financial Integration in the Greater Bay Area
By Saamiya Laroia
Introduction
With a GDP of $2 trillion and a population of 87 million, China’s Greater Bay Area connects Hong Kong, Guangzhou, Shenzhen and Macau and seven other mainland cities to create one of the world’s most economically powerful megacities. The financial integration of Hong Kong to mainland China has steadily progressed with initiatives such as Shanghai-HK Stock Connect, Shenzhen-HK Stock Connect, Bond Connect and most recently Wealth Management Connect in 2021. The connection of a leading global financial center like Hong Kong with tech powerhouses on the mainland such as ‘Silicon Valley of China’ Shenzhen, provide plenty of opportunities for Fintech development, especially since China has already carved out a place for itself as a leader in Fintech implementation. The 2022 Ernst & Young Fintech Adoption Index, noted that China had the highest rate of fintech penetration among all major economies, at 87% (Kim, 2022).
After two years of regulatory crackdowns on fintech giants like Ant Group which wiped out almost $1 trillion of market value for these tech companies, Guo Shuqing of the People’s Bank of China, essentially declared that it had come to an end. He said: “Next, we’ll promote healthy development of internet platforms” (He, 2023). This may bring a note of optimism to the regulatory landscape with regards to Fintech and mark an intensification of government schemes to foster Fintech innovation. In 2021, the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China signed a MoU on Fintech Innovation Supervisory Cooperation, with a plan to connect the PBoC’s Fintech Innovation Regulatory Facility and HKMA’s Fintech Supervisory Sandbox in the GBA (Hong Kong Monetary Authority, 2021).
PBOC also recently released China's Fintech Development Plan for 2022-2025 which set out 8 main tasks that included improving fintech governance and enhancing regulatory supervision which suggests that China is prioritizing a regulated and balanced surge of fintech growth (Qian, 2021). However, too much regulation could be a threat to the GBA’s fintech landscape and the success of integrating Hong Kong with the mainland entails finding a way to deal with Beijing’s stringent regulations on capital flows, data, cyber and business risk (Digital Finance, 2023). Blockchain is a cryptographically-secure digital ledger that maintains a secure, immutable, and decentralized record of all transactions among the nodes of a peer-to-peer network. Blockchain technology poses an answer to some of these problems and presents many potential growth opportunities for the GBA.
Potential Applications of Blockchain in GBA Financial Services
Streamlining the Know Your Customer Process
In 2022 China released New Measures which mandate banks to carry out thorough customer due diligence investigations in a stricter and more structured manner to update China’s KYC regulations in line with a rigorous international standard (Glueck et al., 2022). However, intensified due diligence checks are both research and time-intensive and can significantly slow down operations. Blockchain technology presents an effective solution to streamline the fulfillment of these reformed Know-Your-Customer (KYC) regulations since it allows the creation of a verified core digital identity, that allows banks to have a single point of information and allows clients to rapidly accelerate any onboarding processes. Furthermore, KYC checks done using blockchain reduce the threat of personal identifiable information (PII) being disseminated (Freund, 2018). Bluzelle Networks and KMPG worked with a consortium of major Singaporean banks and regulators to develop a proof-of-concept KYC utility on blockchain that passed regulatory tests and resulted in estimates of 25-50% cost savings since it provided a well-defined audit trail and reduced duplicate registrations (KPMG, 2018). A blockchain-based remote KYC system would be critical to the success of initiatives like Wealth Management Connect in the GBA which would eliminate the need for Mainland China clients to inconveniently travel to Hong Kong for opening of accounts (PwC, 2020).
Creating a real-time, standardized Database for Credit Transactions
There is a significant problem in ensuring reliable and streamlined data access between all GBA regions with their three differing sets of privacy regulations which gets exacerbated by the hampering effect of KYC compliance to lead to SMEs in the GBA remaining under-served (PwC, 2020). A 2022 PwC report gave the example of Guangdong Local Financial Supervision and Administration Bureau’s initiative to build up data on 11m businesses in Guangdong to build up profiles and credit risk ratings based on a blockchain that enables real-time access to this information by 26 government agencies. SMEs were encouraged to share data on the promise of easier access to credit through financial institutions. Such an initiative provides a valuable proof-of-concept for a similar blockchain network in the GBA where financial credit lenders across Hong Kong and Mainland China could follow a standardized credit scoring system and have real-time access to a large dataset of verified information that enables the efficient scaling of credit-lending needed for expanding business growth in the GBA.
Enabling cost-efficient Cross-Border Transactions through CBDC
In a HKMIR-commissioned survey conducted in 2022, over 90% of financial institutions considered cross-border payment transactions and settlement activities as vital to their GBA outreach activities. The report goes on to note the important role of blockchain in the issuance and use of central bank digital currency (CBDC) which would optimize the speed and cost of cross-border transactions in the GBA while cutting intermediary chains between sending and receiving banks short (HKMIR, 2023). A joint research report by JP Morgan and Oliver Wyman found that global corporations incur more than $120 billion in transaction costs excluding the hidden costs of trapped liquidity and delayed settlements and makes a case for mCBDCs as the solution to this (JPM, 2021). The BIS Innovation Hub Hong Kong Centre, HKMA, PBoC, BOT and CBUAE are collaborating to build a multi-CBDC platform called MBridge based on a blockchain ledger built by central banks to comply with regulatory standards (BIS, 2022). In 2022, the project was successfully used to conduct 160 cross-border transactions of more than HK$171 million (HKMIR, 2023). The implementation and fine-tuning of these projects present a significant opportunity for corporations throughout the GBA to reap substantial benefits.
Regulatory Landscape for Blockchain in China
Blockchain was featured as one of the key industries of the digital economy for development in China’s 14th five-year plan for 2021-2025. The CCP promised to foster blockchain technology and wrote, “We will promote the innovation of blockchain technology such as smart contracts, consensus algorithms, encryption algorithms, and distributed systems, focus on alliance chains to develop blockchain service platforms and application solutions in the fields of fintech, supply chain management, and government services, and improve supervision mechanisms” (CSET, 2021). Despite the government’s complete ban and continuing crackdown on cryptocurrencies from 2017-2021, the government clearly supports the development of the underlying technology of blockchain. In 2019, Xi Jinping emphasized China's imperative to capitalize on blockchain technology's potential and become a global leader in the field. In 2021, the Ministry of Industry and Information Technology established a National Blockchain and Distributed Ledger Technology Standardisation Technical Committee soon after the release of the PBoC’s Financial Distributed Ledger Technology Security Standards (CBN, 2020). Notably for the GBA, the PBOC, CBIRC, SAFE and CSRC issued the 2020 Opinions Concerning Financial Support for the Establishment of the Guangdong-Hong Kong-Macao Greater Bay Area, where they expressed a commitment to creating a blockchain trade financing information service platform and suggested that they would actively invest in technologies like blockchain to improve regulatory monitoring of cross-border transactions (KPMG, 2020). China is still currently in the process of developing a regulatory framework for blockchain. A draft guideline from MIIT aimed to clarify their top-down tech standards for blockchain by 2023 and improve the standards system by 2025 (Reuters, 2023) This means that there is still room for the government to create regulations with the GBA in mind. Since there are three different jurisdictions in the GBA, blockchain regulations should be formulated in a standardized way across all GBA cities to ensure efficiency and room for innovation.
Conclusion
Blockchain has the potential to significantly boost the growth and development prospects of financial services and financial integration in the Greater Bay Area. Many blockchain systems are already underway and showcasing the benefits of distributed ledger technology such as Guangfa Bank’s first cross-border transaction system, HKMA-facilitated eTradeConnect, OneConnect’s Trade Blockchain, MBridge, etc. Blockchain technology can help create the flow of data across all three GBA regions that will enable it to be a truly integrated financial system. The unrestricted flow of financial information and goods in the GBA region that can be enabled by blockchain is key to its success in becoming a cohesive and dynamic global financial hub.
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