Bank for International Settlements, Hong Kong central bank tap distributed ledger tech to raise SME funding

The Bank for International Settlements (BIS) Innovation Hub and the Hong Kong Monetary Authority (HKMA) are collaborating on a new offering to improve payments for small and medium enterprises (SMEs).

Tagged Project Dynamo, the prototype will leverage the robust benefits of decentralized finance (DeFi), distributed ledger technology (DLT), and smart contracts to restore investors’ faith in the industry. The move is also geared towards improving the amount of funding available to SMEs and solving the problem of cross-border financing.

“The intention is to enable policymakers and the financial service industry to develop a deeper understanding of whether and how these technologies can reduce transaction and borrowing costs, facilitate productive financing and promote financial inclusion,” BIS wrote in a statement.

The role of SMEs in the national economy is often overlooked, but a study conducted by the World Bank points out that they make up 90% of businesses and employ up to 50% of the working population. Despite their integral role in the national fabric, they are often plagued with funding challenges up to the tune of over $5.2 trillion in funding needs unmet annually.

BIS notes that these challenges have been made grimmer following the effects of the coronavirus disease pandemic on the global economy. Both parties claimed that using DLT will open a new frontier for funding SMEs by confirming the veracity of invoices and preventing the multiple uses of one invoice to raise numerous funds. Peer-to-peer lending on DeFi platforms is one way that BIS says will improve SMEs, and using central bank digital currency (CBDC) might provide answers to the debacle of cross-border payments.

“In addition to project Dynamo, the research will extend into related topics such as decentralized identifiers and the interoperability of digital payment methods such as stablecoins and central bank digital currencies,” read the statement. “The use of artificial intelligence and big data to enhance SME credit risk assessment and innovative supply chain financing solutions are also of interest to us.”

BIS leading the charge

The BIS, a body comprising 61 central banks, is at the fore of exploring novel ways of improving cross-border payments. The body has not shied away from researching digital assets’ viability in attaining its goals.

In particular, BIS believes that CBDCs are the future of international payments, given “the structural limitations of crypto and decentralized finance.”

The body claims that the progress of wholesale and retail CBDCs would foster financial inclusion while protecting users’ privacy. Hong Kong is in the process of creating its digital currency in the mold of the Chinese digital yuan but is proceeding with caution.

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