Last year, Visa collaborated with HSBC and Hang Seng Bank to pilot tokenisation projects as part of the Hong Kong Monetary Authority (HKMA)’s e-HKD Pilot Programme.

In a report, Visa presents collective learnings on these efforts, highlighting the potential value of tokenisation, including higher payment efficiency, reduced settlement risk, enhanced transaction transparency and 24/7 availability.

The pilot projects focused on using tokenized deposits, which are digital representation of bank deposits minted on a bank’s blockchain ledger, backed by the institution’s balance sheet.

Visa provided technical and engineering expertise for this pilot, including creation of a simulated central bank ledger, while HSBC and Hang Seng Bank provided insight into their clients’ needs and expectations.

The participating banks used an early stage build of Visa’s tokenized deposit technology solution to accomplish end-to-end testing of the use cases identified.

The pilot projects were conducted in a sandbox environment under controlled conditions and tested two interbank business-to-business (B2B) payment flows using tokenized deposits settled over wholesale central bank digital currency (wCBDC): property payments and acquirer-merchant settlement.

e-HKD’s property payments use case

In the property payments use case, the payment process utilized tokenized deposits as the payment mechanism between customers of different banks for a property purchase. The proposed workflow used Visa’s tokenisation solution for digital assets to address the challenges affecting the current property purchase process, including transaction limits, lack of transparency and settlement delays.

Currently, the property purchase process involves several steps and intermediaries. Initially, the property buyer and developer agree on the price.

The buyer then pays the deposit via cheque, which takes days to settle, and transfers the remaining funds through real-time gross settlement (RTGS), which can take hours to a day.

In this process, the property developer lacks real-time visibility into payment status, which can lead to uncertainty and delays in the overall property purchase process.

The proposed workflow addressed these limitations and improved the efficiency and transparency of the property purchase process.

Pilot testing of the workflow showed that the transfer of funds took less than 90 seconds, an improvement compared to the current system.

Furthermore, the proposed solution enhanced transparency by providing near real-time notifications to banks, buyers and sellers.

All parties involved in the transaction had more immediate visibility into the status of payments, enabling better decision-making. The use of blockchain technology also helped ensure that all transactions were recorded on an immutable ledger, providing a tamper-proof audit trail.

Acquirer-merchant settlement use case for e-HKD

The second project, the acquirer-merchant settlement use case, explored the use of tokenised bank deposits for transacting payments in the settlement process between an acquirer and their merchants.

An acquirer, typically a financial institution, processes credit and debit card transactions for merchants. After a customer’s transaction has completed, the acquirer initiates the settlement process to transfer funds to the merchant’s account.

The acquirer then initiates a transfer to the merchant’s bank account, which can take an additional few hours to a day to settle. Throughout this process, the merchant lacks real-time visibility into the status of the settlement, making it difficult to manage cash flow and reconcile transactions.

The proposed workflow aimed to introduce a new approach to B2B payments, offering transparency, improving liquidity management, and enhancing current last mile payment processes. It utilized tokenized e-HKD and Visa’s tokenization solution for digital assets to enable near real-time settlements.

Pilot testing of the workflow showed that it eliminated several pain points associated with the current workflow. First, near real-time settlement for merchants was achieved, which significantly reduced reconciliation time and improved the merchant’s cash flow management and liquidity.

Merchants received near real-time notifications of the settlement, enabling better transaction reconciliation and reducing the risk of disputes. Blockchain, meanwhile, provided a tamper-proof audit trail, enhancing the overall transparency and trust in the settlement process.

Key findings

Visa’s pilot testing demonstrated positive results. First, it revealed that tokenisation and blockchain technology can significantly improve B2B transactions, making them faster and more secure.

The solution also enabled near real-time crediting and reduced settlement risk, improving liquidity by reducing collateral needs and settlement times.

The projects used an atomic settlement process, where all transaction parts occurred simultaneously or not at all, reducing settlement risk.

Near real-time crediting by banks minimized the risk of not receiving settlement funds, enhancing liquidity by lowering collateral requirements and settlement times.

Furthermore, tokenized deposits enable 24/7 transaction and settlement availability, allowing continuous transactions and settlements.

During the pilots, Visa’s platform was accessed by staff in various time zones, including times outside traditional payment system hours, showing that the platform can operate continuously across time zones without failures.

Finally, testing showed that on-chain transactions can remain encrypted when viewed using block explorers. This ensures tokenized deposits can be fully transacted while keeping identity, balances, and transaction amounts confidential.

HKMA’s e-HKD Pilot Programme

HKMA officially began researching retail CBDC in 2021, and has been involved in Project e-HKD to study the prospect of issuing a retail CBDC in Hong Kong since June 2021.

In November 2022, it launched the e-HKD Pilot Programme to explore and evaluate the commercial viability of potential use cases for an e-HKD as well as to gain actual experience through a series of pilots conducted with the industry.

Phase 1 of the e-HKD Pilot Programme commenced in May 2023 and deep dived into potential domestic and retail use cases. It saw the participation of 16 firms from the financial, payment and technology sectors.

Phase 2 of the program, which began in March 2024, seeks to delve deeper into select pilots from Phase 1 where an e-HKD could add unique value in areas such as programmability, tokenization and atomic settlement. It will also explore new use cases that have not been covered in the previous phase. Phase 2 is expected to last until mid-2025.

Featured image credit: edited from freepik