Aware of the potential impact of central bank digital currencies (CBDCs) on cross-border trade, banking regulators are increasing their interest in offerings by collaborating with their peers.

The Hong Kong Monetary Authority (HKMA) said it is exploring cooperation with the Bank of France for wholesale CBDCs, with the two regulators signing a Memorandum of Understanding (MoU). The bilateral efforts by Hong Kong and France follow the European Central Bank’s (ECB) second round of wholesale central bank money experiments.

The ECB is paving the way with CBDCs through its own close-knit pilots involving several regional central banks. However, the Bank of France’s border-only studies on wholesale CBDCs and tokenization make it the perfect partner for Hong Kong in the EU.

France’s central bank has recorded a string of early wins for real-time cross-border payments with its DL3S platform, which the ECB describes as a complete blockchain interoperability solution. Hong Kong’s attempt at wholesale CBDCs received a setback after the launch of Project Ensemble, an experiment involving the use of tokenized deposits for settlements.

The two countries will explore interoperability of their wholesale CBDC systems through a regulatory sandbox to strengthen communication and cooperation. The experiments will focus on currency payments and cross-border transactions involving the two countries’ financial institutions, but differences in currency and financial market infrastructure stand as a potential hurdle.

“As we have set a clear goal of improving cross-border payments, we have had the Eurosystem’s research work with the HKMA on different use cases for payments between Hong Kong dollars and the tokenized form of the euro. “There is an opportunity to cooperate,” said Denis Beau, First Deputy Governor of the Bank of France.

The press release did not mention the M Bridge, the most advanced cross-border CBDC project to date, in the development of which Hong Kong is a key player. However, the ECB and the Bank of France have previously said they are closely monitoring mBridge’s development.

Nevertheless, the experiences of the ECB and the French central bank differ from the model proposed by mBridge, fueling speculation that the HKMA will explore a new model for CBDC settlement with its French counterpart.

France’s passion for CBDCs

France is experimenting with the concept of wholesale CBDCs outside the scope of the ECB, which outlined three models for offer in a 2023 report. The first is an interoperability model that allows tokenized assets to remain on their native distributed ledger while the second connects to the ECB through an integrated model.

The third, dubbed the distributed model, combines the advantages of the first two models with the bank committed to being technologically agnostic in its quest to develop wholesale CBDCs. A key driver of the French banking regulator experimenting with tokenization is the need to prevent stablecoins from taking over the financial ecosystem.

To learn more about Central bank digital currencies And some design decisions to consider when creating and launching, read on nChain’s CBDC Playbook.

See: CBDCs are more than just digital money.

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