On 28 August 2024, the Hong Kong Monetary Authority (HKMA) launched the Project Ensemble Sandbox (Sandbox) to explore asset tokenisation use cases and the settlement of tokenised asset transactions. The Sandbox is a crucial component of Project Ensemble, which launched in March 2024, to explore new financial market infrastructure (FMI) to facilitate seamless interbank settlement of tokenised money using wholesale central bank digital currency (wCBDC).
The Sandbox
The Sandbox has been designed as a new FMI that facilitates the full lifecycle of a tokenised asset transaction, starting from the creation and trading of tokenised assets, through payment and settlement using tokenised commercial-bank deposits, to final interbank settlement using wCBDC issued by the HKMA.
The initial round of experimentation under the Sandbox will explore tokenisation of both traditional financial assets and real-world assets under the following themes and use case categories:
- fixed income and investment funds – bond and fund;
- liquidity management – repo and treasury management;
- green and sustainable finance – carbon credits and EV charging stations; and
- trade and supply chain finance – supply chain finance and trade finance and payments.
Cross-border payment functionalities will also be an element of the Sandbox. As noted in our previous update, the Banque de France (BdF) and the HKMA announced in June 2024 that they had entered into a Memorandum of Understanding to promote innovation in the wCBDC and tokenisation market. At the Sandbox launch, the HKMA’s Chief Executive Eddie Yue highlighted that the Sandbox and the BdF’s equivalent system (i.e. the Distributed Ledger for Securities Settlement System (also known as DL3S)) have been successfully connected and pilots have demonstrated that atomic cross-border settlement can be performed through the linked systems.
The Securities and Futures Commission (SFC) has announced that it will co-lead the tokenisation initiatives for the asset management industry under the category of fixed income and investment funds to promote wider adoption of tokenisation. The SFC will work with the HKMA to provide regulatory guidance and address industry’s concerns that arise from these use cases.
The launch of the Sandbox follows the establishment of the Project Ensemble Architecture Community (the Community) in May 2024. The Community comprise a diverse spectrum of industry representatives from banks, technology companies, regulators (including the SFC) to academics. Its aim is to develop a set of industry standards to support interoperability among wCBDC, tokenised money and tokenised assets. Banks that are part of the Community have connected their tokenised deposit platforms to the Sandbox, which allows participants of the Sandbox to experiment with both interbank payment-versus-payment and delivery-versus-payment settlement.
The HKMA also noted that it will be seeking to collaborate with the Bank of International Settlements Innovation Hub Hong Kong Centre, which the HKMA has previously worked with on other tokenisation projects, such as Project mBridge and Project Genesis, as well as the CBDC Expert Group (a group of academics with expertise relevant to HKMA’s research work on CBDC and a Community member), to further advance the Sandbox.
Looking to the future
The Sandbox has been designed in a way that will enable it to support various forms of digital money and digital assets beyond those explored in the initial round of experimentation under the Sandbox. Through the Sandbox, industry participants will be able to experiment with new tokenisation ideas and bring those to the market in the future.
At this early stage, the HKMA is already actively working to evolve the Sandbox into a production-ready FMI that will support real-money tokenised transactions in Hong Kong in the future.
The cooperation between the HKMA and the SFC on Project Ensemble signals the efforts by the regulators to promote tokenisation and the development of a common standard for tokenised asset settlement in Hong Kong.