Finextra Article: Behind the Scenes, Hong Kong is Setting the Stage for the Next Fintech Revolution

All around the world, central banks are exploring and experimenting with the potential of Central Bank Digital Currency (CBDC), with around 100 countries having launched projects related to the technology to date. While the technology is still in its infancy, it has the potential to fundamentally alter the global payment landscape and international commerce.

As a global financial centre, Hong Kong is at the forefront of CBDC innovation. Since 2017, the Hong Kong Monetary Authority (HKMA) has been researching the potential of Distributed Ledger Technologies, their possible applications and benefits, resulting in several well-recognised projects.

On the wholesale CBDC (wCBDC) front, the HKMA collaborated with the Bank of Thailand to initiate Project Inthanon-Lion Rock in 2019 to explore the application of CBDC in cross-border payments. The project eventually evolved into the mBridge trial platform, which involved the HKMA, the Bank of Thailand, Central Bank of the U.A.E., People’s Bank of China, as well as strong support from the Bank for International Settlements Innovation Hub (BISIH). The platform successfully showed that the technology can increase the speed of cross-border payment to near real-time. Together with 22 private sector participants, it also identified 15 use cases for CBDCs.

On the retail CBDC (rCBDC) front, Hong Kong is leading the way with the HKMA recently publishing a whitepaper exploring potential technical design options for issuing and distributing rCBDC. Based on research by the HKMA and the BISIH Centre in Hong Kong, the study is one of the first to unveil a groundbreaking design that strikes the balance between traceability and privacy.

Hong Kong’s leadership in CBDC aptly shows that the city has been setting the stage for the next fintech revolution. With a wide range of initiatives designed to fast-track innovation as well as a solid foundation for fintech firms to scale, the city is set to play a key role in determining the future of finance and technology.

Building on Hong Kong’s leading position in the field, InvestHK and the HKMA recently announced the addition of the CBDC track to the Global Fast Track (GFT) programme. The track gives banks, fintech firms, and tech companies from around the world opportunities to work with the central banking institution to launch pilots and conduct research in eight focus areas, including rCBDC, wCBDC, programmable money, interoperability, privacy, cybersecurity, foreign exchange and liquidity management, and offline payments. In addition, shortlisted candidates will be invited to pitching sessions and compete for three awards – Best Use Case Award, Best Technology Award, and Best Ecosystem Award – to further promote future adoption of cutting-edge solutions. The CBDC track has so far been received enthusiastically by the industry, demonstrating the timeliness of the initiative.

The addition of the CBDC track is part of the expanded GFT 2022 programme, which aims to connect global fintech companies with a diverse range of Asian corporates, investors, and service providers to explore partnership and investment opportunities. Through matching portal, pitching competition, and mentoring sessions, the year-long programme provides comprehensive support for global fintech firms working in eight verticals, including Commercial Banking, InsurTech, InvestTech and WealthTech, Payments, RegTech, Retail Banking, and Environmental, Social, and Governance (ESG), to scale and grow in Asia and beyond.

During last year’s GFT, over 300 fintech firms received support from over 90 local and regional corporates and investors. Building on this success, the expanded programme this year will feature for the first time Service Champions selected from a broad spectrum of professional service providers, including Bain & Company, Google, Dow Jones, and more. Their addition to the programme will enable participating fintech firms to draw from a wide range of relevant experiences and access tailored support to accelerate their innovation and growth.

While innovations in the world of fintech continue to emerge at breakneck speed, the Government of the Hong Kong Special Administrative Region (HKSAR) has been proactively updating policies to ensure the sector can grow in a balanced and sustainable environment. For example, a new licensing regime for virtual asset service providers will come into effect next year, ensuring adequate protection for investors and relevant stakeholders in the ecosystem.

Beyond supportive government-led policies and programmes, Hong Kong offers a solid foundation for companies to innovate, scale, and transform the future of fintech.

Already home to over 600 fintech firms, fintech adoption rate in Hong Kong is expected to continue to increase significantly. Some of the leading growth sectors in the next three years include Greentech with a projected growth rate over of 121% according to the Hong Kong Monetary Authority, Legaltech (92%), and Wealthtech (39%), indicating that there is a huge appetite for innovation among the financial institutions in the city. 

Meanwhile, opportunities are plentiful in Hong Kong when it comes to accessing funding. Not only is the city the world’s top IPO market in seven of the last 12 years, but it also boasts the second largest private capital pool in Asia Pacific totaling at US$ 170 billion according to AVCJ. In terms of public funding, the HKSAR Government recently launched the HK$ 5 billion Strategic Tech Fund to fill the gap between series A and series B financing for startups with the aim to further facilitate growth.

As the city continues to adapt, Hong Kong is poised to lead the next wave of fintech innovation. Combining a range of exciting initiatives with positive government support and a diverse ecosystem, the world-renowned financial centre offers the perfect launchpad for startups and scaleups to become fintech leaders regionally and globally.