Blockchain to transform Hong Kong's economy

Blockchain to transform Hong Kong's economyThe hype surrounding blockchain has been tremendous in 2016. Experts and analysts all sing the song of its bright future, very similar to the one of cloud computing 10 years ago. Although it is well known as a spinoff from the bitcoin ecosystem, this distributed ledger technology (DLT) appears to have a more promising development in the business world than the crypto currency.

The World Economic Forum named blockchain technology as one of the top 10 emerging technologies of 2016. Gartner also predicted that blockchain-based businesses will worth US$10 billion by 2020, only about three years away from now. The research firm attributed such development to blockchain’s potential to free up cash, reduce transaction costs and accelerate business processes.

Revolutionizes transactions

One of the reasons that blockchain creates so much buzz is its ability to revolutionize transactions. Despite the remarkable productivity that the internet brought to the business world, a similar change has not been reached with the way people make transactions.

“The basic mechanics of how people and organizations execute transactions with one another have not been updated for the 21st century,” said Samon Tai, distinguished engineer, CTO at IBM China/Hong Kong.

“Blockchain could bring openness and efficiency to those processes that we have come to expect in the internet era. Blockchain makes that happen because it adds trust where there isn’t trust today so more people can do business together more efficiently,” he added.

The open, shared, but immutable ledger technology records the history of transactions.

“This is particularly good at allowing different organizations across the industry to standardize the process and transactions, as well as to commoditize cost,” said Hugh Madden, CTO and co-founder of ANX International, a Hong Kong-based blockchain application provider.

Reforming local financial transactions

So, how is this buzz around blockchain related to Hong Kong?

“There is a perfect storm and opportunity for Hong Kong, particularly in the financial sector, to apply blockchain,” said Madden. “Financial services organizations are constantly looking for opportunities to share costs across the value chain, particularly in the middle or back office.”

“The market opportunity is huge in Hong Kong, considering it is one of the key financial hubs, and also a massive shipping and trading magnet,” added Connie Leung, senior finance services industry director, Asia lead, worldwide financial services, Microsoft.

This view is also shared by the Hong Kong Monetary Authority (HKMA), which published a whitepaper on blockchain with ASTRI in November.

“[The industry seeks] demand for improvement of efficiency by engaging participants directly without the need of involving a centralized party to coordinate and process the transactions,” said Shu-pui Li, executive director (financial infrastructure development division), Financial Infrastructure Department of HKMA.

Li quoted the example of trade finance businesses, where the lack of trust in transaction history creates long and clumsy documentation processes.

“The parties involved don’t trust each other and they only trust the documents,” he said. “As a result, people from the back office have to manually look at hundreds of pages of documents to go through the [transaction] process.”

Li added that the industry also demands access to the latest financial transaction records in a prompt and more trustworthy manner. They are also seeking a comprehensive audit trail and improved fraud detection mechanism.

To help the industry to solve these issues, the HKMA started working with local banks to develop three proof-of- concept (POC) initiatives. They cover three major finance businesses: mortgage loan applications, trade finance, and digital identity management.

“Many of the initial blockchain projects are in the proof-of- concept stage for the banks to learn and understand the benefits of this technology,” said Leung from Microsoft. “These will soon evolve into a scalable pilot/production service.”