Hong Kong bank regulators say it is ‘premature’ to come to any conclusions about blockchain yet

By Tsering Namgyal. First published by MLex 11 November 2016. 

Hong Kong’s bank regulators injected a dose of reality into the euphoria over the uses of the distributed ledger technology known as blockchain, even as the city went on a marketing drive to promote itself as a hub for financial technology firms.

Senior officials at the Hong Kong Monetary Authority, or HKMA, told a fintech event in Hong Kong today that it is too early to say if the industry and the regulators are quite ready yet for a large-scale adoption of the technology underpinning Bitcoin.

Li Shu Pui, executive director of HKMA, said that a lot of questions remain unanswered as to how the technology could be applied widely and safely, the details of which were laid out in the HKMA’s white paper on blockchain released yesterday.

“It is still premature and too early to conclude DLT [distributed ledger technology] to be the only or best solution for all business models and technological issues, and there are many issues which are yet to be addressed,” he said.

Consumer protection concerns are paramount for regulators around the world when it came to blockchain, he said.

Most banks are still exploring and trying to understand the technology and are not yet there in terms of actually implementing the powerful technology.

Yet, as banks increasingly adopt the technology, regulators will eventually come under pressure to respond, he acknowledged.

He raised questions about cybersecurity and data privacy, and the anonymity of the participants on the decentralized database raises concerns about money-laundering, the sale of illegal goods and ransomware payments.

In addition, in a system without one centralized authority it is hard to see who decides when the transactions are finalized and settled, and how to resolve disputes, especially in cross-border transactions.

Inevitably, the rise of blockchain could lead to a growing demand for professionals in legal advisory and guidance and for reviewing blockchain-based contracts, as well as collaboration among jurisdictions.

Any cross-border application of blockchain technology would involve multiple regulators from different jurisdictions, he said, adding that dialogue and collaboration among regulators is important, given the risks of regulatory arbitrage.

The white paper has raised as many as 30 questions that will be answered in subsequent reports.

That said, the potential of blockchain cannot be underestimated, and perhaps it has the strongest use in streamlining cross-border trade finance that involves multiple intermediaries and cumbersome paperwork.

While it is premature to jump to any conclusions about blockchain, Hong Kong’s regulators, legal professionals and technology entrepreneurs should be prepared for fintech, he said.

Norman Chan, the chief executive of the HKMA, speaking earlier at the event, said that Hong Kong would double up its efforts to create an environment that is conducive to financial technology firms.

Hong Kong has already admitted two Hong Kong-based banks in the regulatory sandbox – a safe area where banks and startups can experiment with new technology without having to comply with mainstream bank rules — where they are conducting pilot trials regarding biometric authentication systems, Chan said.

A few banks are also talking to the HKMA to conduct pilot trials in areas such as blockchain, artificial intelligence, and payment systems, he said.

Chan said that the government would form a clearer opinion of blockchain and would issue a second white paper next year, providing more detailed analysis of the regulatory implications of the new technology.

The race for fintech is heating up in the region, with both Hong Kong and Singapore organizing “fintech festivals,” a week after each other.