How might blockchain enhance Hong Kong's banking system?

Blockchain, or distributed ledger technology ("DLT") has been widely touted for its potential to revolutionise financial services across a range of applications, from crypto-currencies to digital identity systems to smart contracts to fully automated clearing and settlements systems for payments and securities. The discussions are often expansive, ambitious and high level, making it difficult to bring a legal or regulatory assessment to any particular solution being proposed.

The "Whitepaper On Distributed Ledger Technology" (the "DLT Whitepaper") which was published by Hong Kong's Applied Science and Technology Research Institute ("ASTRI") on 11 November 2016 is different. It focuses on how DLT may be used to enhance Hong Kong's banking system and does much to move forward discussion about Hong Kong's future in blockchain through its sharp focus on a specific proof of concept project (in mortgage loan applications). At the same time, the Whitepaper recognises that there are legal and regulatory concerns that will need to be addressed in order to see this solution through to fruition.

We have produced a briefing in which we:

• provide a brief overview of DLT as a database technology and its perceived benefits over traditional centralised database systems;

• explain ASTRI's proof of concept project in relation to mortgage loan applications;

• summarise the operational benefits, limitations and risks of the proof of concept identified by ASTRI; and

• analyse the key legal issues with the proof of concept, in particular data protection compliance issues, and how these could be addressed.

The DLT Whitepaper is likely to shape the next phase of discussion on the adoption of DLT by financial institutions in Hong Kong. We believe this important publication signifies the development of DLT from a 'futuristic' notion into a real solution that could drastically change many aspects of the banking industry. The DLT Whitepaper also demonstrates the significant investment being made by the financial services industry in the growth of fintech in Hong Kong. As a leading financial hub regionally and globally, Hong Kong has a large stake here and should take this opportunity to push forward as the new era of DLT-based financial services sees first light.

To read the full briefing, please click here.

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