Hong Kong Government Advises Caution with Distributed-Ledger Technologies

During the HKMA Fintech Day, which was held on November 11 in conjunction with Hong Kong Fintech Week, HKMA executive director Shu-pui Li said in his presentation that it is still too early to conclude that DLT is cure-all for financial services. 

"There are many issues yet to be addressed," he said. These include governance, deployment, risk management, and regulatory compliance, along with legal implications that have not been adequately taken into account.

He said firms must be prudent and not "too excited" about the potential of DLT until all key issues have been adequately addressed.  

Earlier in June this year, the HKMA commissioned the Hong Kong Applied Science and Research Institute (ASTRI) to conduct a study on DLT, which was just released. While the 98-page paper highlights the potential benefits DLT might have for the banking and finance industries, it notes that from a regulatory perspective, many risks remain.

"A key objective of this project is to undertake an open-minded and in-depth examination of the technology, and identify its potential and its risks. This white paper is the first deliverable of this research project. It aims to provide the fintech industry in Hong Kong with a reasonably comprehensive study of the key features, benefits, potential and risks associated with DLT," the paper stated.

Li also noted that DLT is not fully immune to traditional cybersecurity issues, such as distributed denial of service (DDoS) attacks. In fact, he stressed that cyber attacks could be more prominent as there are more access points in a decentralized environment.

He added that the challenge for implementing an effective governance framework in a decentralized environment includes the setting up of oversight and monitoring functions, and audit and compliance functions, as well as determining the accountability and responsibility of it all.

Some banks and industry players participated in the project and looked at proof-of-concepts using DLT in banking and businesses in mortgage loan applications, trade finance and digital identity management.

The regulator, together with ASTRI, aims to issue a second white paper covering further findings from the proof-of-concept work and to better understand practical issues related to deploying prototypes, and also to provide an in-depth analysis of the regulatory implications of DLT.