The Hong Kong Monetary Authority (HKMA) has released a sobering assessment of blockchains — the much-hyped technology that some banks are researching to cut costs — including a warning that it could increase the risk of money laundering.
The anonymity afforded by some distributed ledger platforms could facilitate illicit activities, such as the trafficking of criminal gains, the sale of illegal products and ransom payments, the HKMA said in a study released yesterday on the technology.
While the report highlighted a blockchain’s cost and time-saving qualities, the technology predicated on a shared network of transaction records also offered legal, risk management and regulatory issues, it said.
Distributed ledger technology offers “good potential, but a lot of things need to be addressed,” Shu Pui Li (李樹培), the central bank’s executive director for financial infrastructure, said as part of a presentation for the HKMA Fintech Day. “The most painful issue is legal. A lot of legal issues.”
The study throws a cautionary light on a technology that banks around the world are researching for use in areas such as trade finance and mortgages, as they try to trim expenses and boost profitability.
A blockchain could reduce banks’ infrastructure costs worldwide by US$15 billion to US$20 billion per year by 2022, law firm White & Case said.
More than 70 global financial firms are affiliated with a consortium led by R3CEV LLC, which is developing blockchain applications for use in financial services.
Two of its members, Bank of America Corp and HSBC Holdings PLC, are working with the Singaporean government on a distributed ledger that enables paperless letters of credit for trade finance.
Bank of China Hong Kong (Holdings) Ltd (中銀香港控股), the city’s largest mortgage lender, is working with the Hong Kong government’s Applied Science and Technology Research Institute on a blockchain for use in property valuation. The application, which was highlighted in a presentation at HKMA Fintech Day, is due to be rolled out by the end of the year.
Globally, Greenwich Associates estimated that the annual budget for blockchain initiatives hit US$1 billion this year.
It was too early to make any definite conclusions about distributed ledgers, and the HKMA is aiming to produce a second report with more in-depth analysis, Li said.
“Be prudent, don’t get too excited,” he said.
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