Explainer-How Hong Kong plans to test its digital dollar in $229 billion mortgage market?

By Georgina Lee

HONG KONG (Reuters) – Hong Kong ‘s central bank plans to test the use of its digital currency under a pilot project in its HK$1.8 trillion ($229 billion) mortgage market, with an aim to slash a month-long loan approval process by half, according to the pilot participants.

The test comes amid fierce competition among banks to attract mortgage customers in the world’s least affordable housing market, with some lenders even handing out hefty cash rebates to draw in clients.

Here’s a look at how the digital currency, e-HK dollar (e-HKD), can be potentially used in the mortgage business:

WHAT IS THE E-HKD PILOT PROGRAMME?

The Hong Kong Monetary Authority (HKMA) kicked off the e-HKD pilot programme in May under which 16 firms were selected to examine the digital currency’s use across 14 projects.

Two of the pilot participants, Fubon Bank (Hong Kong) and blockchain solutions provider , will examine the e-HKD’s use in residential mortgage loans, which accounted for a-fifth of the banking sector’s loan book in April.

HOW WILL THE PILOT TEST E-HKD’S USE IN MORTGAGES?

The pilot project will look at potentially giving e-HKD loans to homebuyers in an e-wallet, both online and offline, the pilot participants said.

At the core of the project are property title deeds, which are collateral backing banks’ mortgages.

The project aims to turn deed records into digital tokens on the blockchain, helping keep a single source of truth about the deed which is integrated into the loan approval process.

Currently information on the title deed is first collected from the customer and then checked against a separate property title deed register.

Ripple said in an email it expects the use of the e-HKD to remove the need for a substantial amount of work currently performed by lawyers.

HOW WILL E-HKD REDUCE LOAN APPROVAL TIME?

In Hong Kong, it often takes a month, sometime more, for a borrower to be able to start drawing down loan from the time of application. The pilot aims to reduce this wait by half.

Under the proposed use of the e-HKD in the mortgage market, when conditions such as loan-to-value ratio and the property value are met on the bank’s digital platform, the e-HKD loan will be automatically released as the title deed would already be secured on the blockchain, the participants said.

Fubon said it expects the technology can be used in both new loan applications and mortgage top-ups.

WHAT ARE THE BENEFITS OF A DIGITAL OWNERSHIP RECORD?

Traditionally, banks inspect the ownership record of a property to rule out any pending issues and confirm there are no impediments to transfer before issuing a loan. These processes involve law firms and records stored at the Land Registry.

By storing title deeds on the blockchain, it removes the need for checks and reconciliation across separate systems.

WHAT IS THE NEXT STEP FOR E-HKD?

The HKMA has not decided on the official launch date of the e-HKD. All pilot participants need to present their project findings to the HKMA by September.

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