DBS HK’s Proposed Use Case for Multiple Central Bank Digital Currencies (mCBDC): Cross-Boundary Insurance Payments Between Mainland China and Hong Kong

Benefits include cost savings, automated processes, and transaction efficiencies

Authors: Phil Carmalt & Simon Zhang

Central Bank Digital Currencies (CBDCs) were one of the hot topics at Hong Kong Fintech Week and Singapore Fintech Festival in 2021 — but what are some of the tangible ways CBDCs can positively impact customer experience and process efficiency?

Last year, DBS Bank (Hong Kong) Limited — along with other participating banks in Hong Kong — was invited by the Hong Kong Monetary Authority (HKMA) to provide potential use cases for its multiple CBDC (mCBDC) platform, Project mBridge. The various use cases included areas such as cross-border settlement, cross-border trade, and securities settlement for its multiple CBDC (mCBDC) platform — Project mBridge.

An example our team provided was for cross-boundary insurance payments between Greater Bay Area cities in mainland China and the Special Administrative Regions of Hong Kong & Macau. In this blog post, we’ll be sharing more about the use case and how we can leverage the proposed Project mBridge to provide near real-time settlement and exchange for our customers. While this use case is still only on paper currently, it has the potential to transform the end-to-end cross-boundary payment process.

Future-proofing Hong Kong

In its ‘Fintech 2025’ strategy, the HKMA highlighted strengthening research work on CBDCs as a key means of future-proofing Hong Kong. As of November 2021, 60 central banks are exploring CBDCs — with three going live and 20 pilots underway.

The CBDC jigsaw is made of three parts: wholesale, retail and cross-border. Project mBridge, which represents the cross-border piece of the puzzle for Hong Kong, is a multi-jurisdictional project that was first initiated by the HKMA and the Bank of Thailand. It was later joined by the Central People’s Bank of China (PBOC) and the Central Bank of the United Arab Emirates.

The purpose of Project mBridge is to develop a protocol and platform that will allow these jurisdictions to exchange their digital currencies in a cross-border context. The platform would be built on blockchain technology, and be scalable to allow more countries and jurisdictions to join in at later stages.

Current Pain Points and Leveraging mBridge Platform

DBS HK’s proposed mBridge use case of cross-boundary insurance payments leverages on the PBOC’s Greater Bay Area (GBA) Circular 2020–95 issued in June 2020. The Circular relays the allowance of cross-border insurance payments to be conducted in RMB (renminbi — the official currency of the People’s Republic of China) among eleven GBA cities. These cities include nine in mainland China and two Special Administrative Regions — Hong Kong and Macau. Furthermore, Hong Kong and Macau have been encouraged to jointly develop innovative cross-boundary insurance products. Doing so could potentially benefit cross-boundary policy holders in areas such as underwriting, investigation and claims.

That being said, enabling such products via current methods such as cash or telegraphic transfers would be both inefficient and expensive. DBS HK therefore sought to leverage this Circular and the mBridge platform to create a use case that would enable insurance companies in Hong Kong to receive insurance premium payments in the form of China’s CBDC — referred to as e-CNY (electronic Chinese Yuan). Through this initiative, insurance companies in Hong Kong and Macau could pay claim payouts in RMB — in the form of e-CNY — to individuals in mainland cities within the GBA.

Our Proposed Solution

Let’s have a closer look at the proposed solution. Leveraging the GBA Circular 2020–95, Hong Kong and Macau-based insurance companies can set up service centres in GBA cities in the mainland. This enables said insurance companies to provide after-sales services such as premium collections, claims settlements, policy renewals, surrenders and more. GBA-based policy holders can then engage with the service centres to pay insurance premiums in RMB. The service centre can then initiate the payment instruction to remit the collected funds in e-CNY to the insurance company’s DBS account in Hong Kong or Macau.

mBridge’s Supporting Technologies: Blockchain and API

The mBridge platform will be built on blockchain technology, which means the transactions can be pre-validated before being settled instantly on a 24/7 basis. This would effectively eliminate the transaction costs incurred by delayed or returned payments which could be due to incomplete or incorrect account information, correspondent bank charges and floats of holidays.

In addition to blockchain, we believe that API would be an essential component in this proposed use case. For example, via API integration with DBS, we can fully automate processes such as service centres initiating payment instructions, as well as insurance companies receiving credit notifications of funds and reconciliation files. This, in turn would further improve end-to-end transaction efficiency. In fact, the mBridge platform will also use APIs for enabling banks and exchanges to run and interact with nodes on the ledger. For example, there would be APIs for viewing Board Rates, requesting FX quotes from other participants on the platform, as well as transferring funds to other participants on the platform.

Benefits of proposed use case

Firstly, the end-to-end cross-boundary payment process can be greatly improved — with a reduced journey time of from up to five days, to near real-time. Individuals would be able to use their mobile phones to make payments in e-CNY, use the corridor network to convert e-CNY to HKD, and then have the amount credited to the insurance company’s account in DBS Bank (Hong Kong) instantly. What’s more, DBS can provide reconciliation data to the insurance company via API, so that the insurance company can automate their reconciliation process.

Such an implementation would also enable significant resource savings for DBS. In addition to the savings gained from a higher straight-through processing rate, as well as reduced manual intervention, banks could also eliminate correspondent bank charges to clients.

What’s Next?

As of November 2021, Project mBridge is expected to launch its pilot in 2022 with the ultimate goal of achieving a minimum viable product and a production ready system which can support the end-to-end process of use cases such as those relayed above.

As a leading financial services group in Asia, DBS seeks to shape the future of banking through digital technologies — working with partners to play a leading role in the GBA’s economic growth and digital transformation.

About the Team

Phil Carmalt heads the GTS Cash Product team in Hong Kong, DBS’ 2nd largest market. Phil has deep expertise of the transaction banking industry from 17 years in diverse roles across technology, project management, product management, client management, innovation and sales. He has worked in the UK, Singapore and Hong Kong.

Simon Zhang is the Cash Product Specialist of GTS HK. He has over 14 years of experience in corporate cash management — gained from various roles in sales, product development and implementation. He has also acquired a deep understanding on the topic of cross-border cash management.

DBS’ Global Transaction Services (GTS) is a product group tasked with the management and sales of Cash Management, Trade Finance, Securities & Fiduciary products and services to our institutional clients. We aspire to be recognised by our clients and competitors as one of the top GTS providers in our key markets in Asia.