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TL;DR

• Through the Project Ensemble Sandbox, Hong Kong is researching the tokenization of tangible assets like bonds and intangible assets such as carbon credits. It is also exploring interoperability with CBDC, positioning Hong Kong as a new hub for RWA.

• Hong Kong has already researched CBDC-based payment systems. Next, it is expected to expand its reach to cross-border payment systems by collaborating with European payment systems and projects within this sandbox.

• Hong Kong has consistently pursued projects related to CBDC and asset tokenization. Its active movement toward issuing a physical CBDC signals promising future outcomes. However, the negative stance of countries like the U.S. towards CBDC and the complex interests of global markets and institutions must be closely monitored.

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1. Hong Kong Emerges as the New Hub for RWA and CBDC Markets

One of the most significant trends in the Web3 market today is the rise of Real World Assets (RWA). RWA refers to the tokenization of real-world assets, making it highly relevant to areas such as Central Bank Digital Currencies (CBDC) and stablecoins.

Unlike many Web3 projects that typically bypass regulatory frameworks, the RWA market must comply with financial regulations. As a result, many projects are seeking jurisdictions with favorable regulatory environments, with Singapore and the UAE frequently cited as top destinations.

source: Apollo crypto

This is where Hong Kong enters the scene. The Hong Kong Monetary Authority (HKMA) launched the "Project Ensemble" sandbox in March to explore use cases for asset tokenization and the integration of tokenized assets with CBDC. The project aims to research the use cases of asset tokenization and explore the possibility of combining it with CBDC. With a particular focus on real-world assets such as bonds, there is interest in whether Hong Kong could become the next RWA center.

2. Project Ensemble: Hong Kong's Challenge to Digital Financial Innovation

2.1 Project Ensemble’s Convergence of RWA and CBDC through Sandboxes

Source: HKMA

Hong Kong’s Project Ensemble aims to test the interoperability between tokenized assets, deposits, and wholesale CBDC within a sandbox environment. The objectives set by the Hong Kong Monetary Authority (HKMA) at the launch of the sandbox include the following:

1. Studying use cases of tokenized assets under regulation: Participants can explore and analyze the regulatory frameworks governing tokenized assets.

1. Validating technical compatibility: Industry players are encouraged to test the technical compatibility of CBDC, digital assets, and tokenized deposits.

1. Setting industry benchmarks: The sandbox leverages technology and pilot case protocols to establish benchmarks for industry standards.

1. Addressing real-world problems: Project Ensemble encourages use cases aimed at solving challenges in supply chain financing and financing within the real economy.

Project Ensemble Sandbox Areas and Participants, Source: Tiger Research

The sandbox will allow participants to test the trading of tokenized assets in various real-world business scenarios. The key business areas identified by the HKMA include 1) bonds and investment funds, 2) liquidity management, 3) green and sustainable finance, and 4) trade and supply chain finance. These four areas share three key characteristics:

1. Transparency: Historically, these sectors have struggled with transparency and trust issues. Blockchain-based CBDC are expected to enhance the transparency of transactions in both intangible and real assets by utilizing distributed ledgers that prevent tampering and ensure the integrity of transaction histories. This is especially critical for real assets like bonds and carbon credits.

1. Efficiency: Traditional methods of trading physical assets often involve complex processes with multiple intermediaries. Blockchain-based CBDC and smart contracts can automate and streamline these transactions, enabling real-time settlements and reducing transaction costs by minimizing intermediary involvement. This increases the efficiency of trading tokenized real-world assets by making transactions faster and more precise.

1. Stability: These sectors require a stable payment infrastructure. CBDC, being digital currencies issued by central banks and typically pegged to traditional currencies on a 1:1 basis, provide the necessary stability for both real and intangible asset transactions. The integration of asset digitization and a stable payment system ensures the reliability of transactions.

The Project Ensemble Sandbox is gaining ground for Hong Kong to become a leader in the RWA and CBDC markets by integrating CBDC across various sectors, including real assets and traditional securities.

2.2 Project Ensemble’s End Goal: Transforming Global Finance with CBDC

Source: HKMA Linkedin

In addition, Hong Kong has made significant strides in establishing a cross-regional payment system. The HKMA has enabled companies participating in the Project Ensemble sandbox to experiment with interbank payments and remittances using CBDC. This initiative has attracted major Hong Kong banks, including Bank of China, Hang Seng Bank, and Standard Chartered Bank (Hong Kong).

This builds upon Hong Kong’s previous efforts, including the successful demonstration of a cross-regional payments system through its digital yuan (e-CNY) pilot program. Especially The HKMA was collaborating with the Bank for International Settlements (BIS) Innovation Hub and assembling a team of CBDC experts to enhance the project’s technical expertise. The current sandbox is expected to explore standards for an inter-institutional payment system using wholesale CBDC (wCBDC).

Additionally, the liquidity management component of the Avon Sandbox has seen participation from Ant International, which has previously announced plans to advance cross-border payment solutions in Europe through strategic collaborations. Following the announcement of Project Ensemble, the HKMA also revealed a collaboration with DL3S, a French CBDC platform, to conduct interoperability tests aimed at enabling cross-border payments through central banks.

In summary, with Project Ensemble, Hong Kong appears to be upgrading its cross-border payment system to position itself as a global financial hub. The substantial participation of international companies suggests that this initiative is expected to deliver tangible outcomes, extending beyond mere sandbox testing.

3. Hong Kong’s Strategic Role in Tokenization and Digital Finance

Hong Kong has been at the forefront of research in three critical areas: 1) the tokenization of intangible assets, 2) the tokenization of real-world assets (RWA), and 3) the issuance of physical CBDC and their integration with tokenized assets. Throughout this process, Hong Kong has conducted various projects in collaboration with China, Thailand, Europe, and other regions, consistently testing its initiatives on an international scale.

With the launch of “Project Ensemble,” Hong Kong has taken a significant step forward. By partnering with key financial and technology players such as the Bank of China, Standard Chartered, BlackRock, and Hashiki Group, the city has established a solid foundation for advancing digital finance. The pressing question now is whether Hong Kong can lead the development of CBDC standards and emerge as a global center for excellence in RWA.

However, the path forward is not without obstacles. In the United States, there is growing resistance to the adoption of CBDC. Some states have already passed legislation banning the use of CBDC, and the House of Representatives has introduced a bill to prohibit their issuance. Given the significant influence of the U.S. in global financial markets, this opposition could hinder the global expansion of Hong Kong’s CBDC-based payment system. Additionally, the complex interplay of interests among institutions, businesses, and governments will likely pose challenges to achieving standardization.

Despite these hurdles, Hong Kong’s initiative is a crucial first step. While it is still early in the process, the involvement of major players in the Asian market makes the potential for future growth promising. We anticipate that Hong Kong’s efforts will help catalyze the next phase of development for the CBDC and RWA markets.

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