The BIS Innovation Hub’s Hong Kong Centre and the Hong Kong Monetary Authority (HKMA) will look into the use of decentralised finance (DeFi) tools to improve access to finance for unfunded and underfunded small and medium enterprises (SMEs).

The launch of Project Dynamo aims to deliver a prototype for the compliant use of DeFi tools such as blockchain and smart contracts for this purpose.

According to a joint statement by BIS and HKMA, the intention is to enable policymakers and the financial services industry to develop a deeper understanding of whether and how these technologies can reduce transaction and borrowing costs, facilitate productive financing and promote financial inclusion.

World Bank research says that SMEs account for more than 90% of all businesses and contribute to more than 50% of employment globally.

However, they traditionally face great difficulties in accessing financing, especially on affordable terms. The same research also estimates that about half of these companies have no access to formal credit.

In developing countries alone, the segment has unmet financing needs of over US$5.2 trillion dollars every year, equivalent to 1.4 times of the current level of global lending to SMEs.

The Covid-19 pandemic has only exacerbated the situation, leaving millions of businesses on the brink of bankruptcy.

In addition to Project Dynamo, the research will extend into related topics such as decentralised identifiers and the interoperability of digital payment methods such as stablecoins and central bank digital currencies.

The project will also look into the use of artificial intelligence and big data to enhance SME credit risk assessment and innovative supply chain financing solutions.

The BIS Innovation Hub is looking for feedback from companies with working solutions in these areas.