OPINION: CBDC Can Prove To Be A Catalyst In Enhancing India-Hong Kong Trade

Hong Kong has been one of the countries to voice its support for crypto and central bank digital currencies (CBDC) of late. From starting retail crypto trades to announcing the introduction of CBDCs, it is becoming increasingly prominent in the APAC region as a prominent crypto hub. Authorities in Hong Kong started discussing CBDC in 2017. Besides the known benefits of CBDC, the country’s desire to stay abreast of all technological developments in the global financial markets is a key motivator behind this step.

With other countries also introducing their own digital currencies, Hong Kong doesn’t want to be left behind in the multi-CBDC-based economic and trade relations that other countries are exploring. This is predicted to lead to a decentralized global payment system, shifting away from the existing dollar-pegged system.

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Benefits Of CBDC

Over the years, with increased globalisation, trade and manufacturing activities across countries, it was expected that the cross-border payment systems would significantly evolve and become suave, efficient, and more sophisticated. However, central banks have not been able to keep pace with the evolving bilateral relations in the world and subsequent ties between countries. With the popularity of crypto’s underlying technology, banks have started considering the adoption of blockchain to ramp up the global financial system and its operations.

CBDCs have a host of benefits when it comes to cross-border transactions. Reports by the International Monetary Fund (IMF), World Bank, and Bank of International Settlements (BIS) have suggested the same based on different levels of cooperation between parties involved, in this case, countries. From fast payments for goods exchange, settling debts, lending capital, etc, CBDCs are the best tool to revolutionise the global payment system and improve financial inflow-outflow by making the payment process more transparent and secure.

In fact, to build a use case of these features, Several central banks, including the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates, are launching mBridge, a multi-CBDC platform for P2P cross border transactions while ensuring jurisdiction compliance for each country it involves. A project is already underway where trade is being conducted across these banks. It is developing and is expected to have more participants join this pilot project to build a comprehensive reference point for CBDC wholesale transactions.

Could India Be Impacted By Hong Kong’s Move?

Speaking of trade transactions, the commercial and bilateral relations of Hong Kong with India have been quite fruitful and have expanded over the years. India and Hong Kong have expanded their commercial relations over the years. Organisations headquartered in Hong Kong have forayed into India and have employed talent from the subcontinent.

According to the Consulate General of India, Hong Kong was India’s seventh-largest export market destination in FY 2021-22. India-Hong Kong bilateral trade was $30.08 billion in FY 2021-22, with a year-on-year increase of 18.73 per cent. The two countries have also collaborated to develop small enterprises in their respective regions. Several manufactured as well as raw materials are exported to Hong Kong from India and have been aiding its ongoing trade ties.

Given the host of benefits that CBDCs bring to global trade, two countries looking at growing and sustaining their ties can take their collaboration to a new level of efficiency, trust, and management.

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For example, In 2018, India and Hong Kong signed a double taxation avoidance agreement to improve tax compliance and reduce the unfair imposition of taxes. With investment relations improving between the countries, more businesses will look for opportunities to expand their presence in the other country. The increasing number of stakeholders can benefit from the implementation of a distributed ledger technology where records of tax payments in either region are input and accessed in real time, thus improving the speed of operations.

Besides that, given the prominent presence of fintech entities from Hong Kong in India and a large number of Indian talent working in the financial sector in the region, it would be helpful to create a skill-based apprenticeship for development in emerging technologies which can be powered by CBDCs.

In 2023, Hong Kong has focused on promoting its regional art and culture, culinary tourism, etc. in the Indian market. This is pegged to boost tourism from India which will need a roster of visa accounts for travellers, details specific to their personal bank accounts, currency exchange, insurance, etc.

With CBDCs, this can be made easier where monetary details are recorded on the blockchain instead of tourists having to convert them into paper currency at various locations where availability, interest rates and counterfeit currency might be an issue.

CBDCs can help mitigate counterparty risks in cross-border transactions by providing a secure and transparent means of settlement between Hong Kong and India.

CBDCs are backed by the central bank, providing confidence in the stability and reliability of the currency, which can reduce the risks associated with exchange rate fluctuations and other counterparty risks.

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According to the Ministry of Commerce and Industry, India has the potential to become the leading supplier of Lab Grown Diamonds (LGDs) to Hong Kong. There is also a focus on responsibly sourced gemstones which support practices of sustainability while focussing on a robust supply chain. All these objectives point towards a platform which will support transparency, real-time development, an expedition of operations, monitor export status, etc. While these aren’t really CBDC-centric, the establishment of blockchain-based trade agreements can be kickstarted with the adoption and implementation of CBDC between the two countries at a smaller scale immediately. This can help create enough studies for stakeholders to monitor its success and suggest improvements.

It should also be noted that Hong Kong’s CBDC philia is being actively supported by Beijing. India remains a key importer of goods manufactured in mainland China and given the market access to digital assets that China would have from Hong Kong, it could be a precursor to a larger trade agreement between China and India to record transactions on the blockchain.

India’s recent MoU with UAE on collaboration for financial innovation focused around CBDC indicates its ambition of maximizing the opportunities the central bank currency project presents. In time, we will witness more such collaborations as blockchain tech adoption goes mainstream.

(The author is the Vice President of crypto investment platform WazirX)

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