Banque de France and HKMA to conduct cross-border CBDC test

The Hong Kong Monetary Authority (HKMA) and the Banque de France (BdF) have joined forces to explore the use of wholesale central bank digital currency (CBDC) and tokenisation for cross-border transactions.

The HKMA will conduct joint tests with the BdF, under the second wave of the European Central Bank’s (ECB) Eurosystem exploratory work, the two central banks said in a joint statement on June 27.

The de facto central bank in Hong Kong is the first non-European central bank to be taking part in the Eurosystem’s trials on using actual CBDCs to settle wholesale financial transactions on distributed ledger technology (DLT) platforms.

The HKMA and the BdF will look into the interoperability between their wholesale CBDC infrastructures, the BdF’s Distributed Ledger Securities Settlement System, or DL3S, and the HKMA’s Project Ensemble Sandbox.

DL3S, developed entirely by the BdF, is capable of issuing tokenised CBDC and distributing them to financial institutions, among its other functionalities.

In March, the HKMA launched Project Ensemble, a new project to explore using a wholesale CBDC to support the interbank settlement of tokenised deposits. It has said it would launch the Project Ensemble Sandbox by mid-2024 for market participants and international stakeholders such as central banks to conduct trials.

The HKMA-BdF study will focus on real-time cross-border and cross-currency payments, aiming to improve the efficiency of cross-border transactions and the interoperability of financial market infrastructures in different jurisdictions.

Denis Beau, first deputy governor of the BdF, said their study will study different use cases for payment versus payment between the tokenised form of the Hong Kong dollar and the euro.

Howard Lee, deputy chief executive of the HKMA, said there is significant potential for collaboration between France and Hong Kong in various areas, particularly in the fintech field and for CBDCs.

The announcement comes after the central banks recently signed a memorandum of understanding to strengthen their communication and collaboration on wholesale CBDCs and tokenisation.

Eurosystem exploratory work

In December 2023, the European Central Bank invited expressions of interest from financial market stakeholders in its wholesale CBDC trials.

It invited market participants with access to the Eurosystem’s Target payments and securities platforms, as well as DLT operators, to take part. The work, designed to “improve knowledge of new technologies”, is scheduled to take place in two waves this year.

The first wave of trials, which started in May, involves the central banks of Germany, France, Italy and Luxembourg, as well as private firms such as BNP Paribas, Deutsche Bank and JP Morgan.

The National Bank of Austria completed the first such experiment in May. It covered tokenisation and simulated the deliver-versus-payment (DvP) settlement of government bonds in a secondary market transaction against central bank money.

On June 21, the ECB Governing Council approved an expanded list of private firms and central banks to join the second wave of tests, which is due to begin in July. In total, 49 private firms from the financial sector and three central banks are taking part in this phase, including the Deutsche Bundesbank, the Bank of Lithuania and the HKMA.

Both the first and second waves of experiments are scheduled to end in November.