Introducing atomic settlement via programmable payment and tokenized fund

Wednesday 6 December 2023 08:31 CET | Editor: Alin Popa | Interview

Eddie Lau, Co-CEO of Arta TechFin, reveals its solution for cash management for low balance retail investors in the HKMA’s e-HKD Pilot Programme.

What businesses are Arta TechFin involved in? How do blockchain payments interact with its other businesses?

Arta TechFin (Arta) is a regulated hybrid financial (HyFi) platform bridging traditional finance with a distributed ledger technology (DLT) financial system via technology innovation. 

Arta is developing regulated products in programable payment and investment. Latest products include tokenized investments in global government bonds and fund shares. One of the pilot use cases is atomic trading and settlement of tokenized investments with central bank digital currency (CBDC) or stablecoin with smart contracts.

How did Arta TechFin become involved in The Hong Kong Monetary Authority (HKMA) e-HKD Pilot Programme?

Arta received the Best Technology Award in the CBDC track of Global Fast-Track Competition organised by InvestHK and the HKMA in November 2022. Subsequently, Arta continued its DLT payment effort with participation in the e-HKD Pilot Programme under the HKMA. Arta was selected by the HKMA to submit a hypothetical e-HKD retail use case in May 2022. The e-HKD Pilot Programme is a key component of the HKMA’s three-rail approach in potential CBDC implementation in the future. 

What specific role did Arta TechFin play in the project, and what proposal did you submit to the HKMA?

ARTA-Emali HK Limited, the entity participating in the e-HKD Pilot Programme, explores in its pilot the atomic settlement of a fund order using e-HKD against tokenized funds, and the ability to integrate operational processes involving upstream and downstream investment intermediaries (for instance, placing agents, fund managers, fund administrators) in a straight-through manner using smart contracts. The HKMA confirmed that Arta TechFin completed a proof-of-concept (PoC) on executing programmable payment for atomic settlement of tokenized fund via the smart contract of a hypothetical e-HKD in October 2023.

Arta’s solution enables retail investors to earn higher interest incomes than bank deposits via direct access to competitive financial products. Other benefits include improving financial inclusion, creating monetary rewards, and unlocking the value of small liquid balances. This mode of straight-through atomic settlement can reduce operational overhead. The investor in turn can enjoy faster order execution and a timelier entry to the market, allowing them to potentially benefit from an extra day of interest income, say with the purchase of a tokenized bond.

Under the PoC, investors can enjoy an end-to-end solution to connect payment and investment via smart contracts. Investors can execute fund order instructions with a specific investment period and target return via the smart contract of a hypothetical e-HKD. The smart contract automatically executes near-instant delivery vs. payment for both fund subscription and redemption on pre-defined dates. Fund managers can issue fund tokens to the investors efficiently, whereas trade recap and live net asset value (NAV) are available throughout the asset holding period.

In testing your solution with financial institutions and merchants, what were their reactions and feedback?

Arta TechFin has performed user acceptance testing on the e-HKD solution with 10+ global financial institutions (FIs) and 100+ potential retail clients. The feedback is largely positive among financial institutions. Most agree that the DLT solution make the fund investment process more time-efficient and cost-effective, enabling financial inclusion, reducing counterparty risks, and unlocking values in liquid balance.

Retail test users appreciate the ability to access market-competitive yields despite that they have small balances and/or only invest for a short period of time. 

FIs welcome Arta solution’s potential in reducing counterparty risks, lowering regulatory costs, and improving operational efficiency. One key highlight is improved transparency and user journey, whereas retail investors could receive near-instant confirmation of the executed order and NAV.

What challenges did Arta TechFin face during its participation in the pilot?

Arta TechFin has identified a few aspects that we will need time for deeper exploration. The transparency level of the ecosystem would be critical for stakeholders to understand which parties will be allowed to be a node on the chain and what information access rights the nodes have. 

Another aspect is how we handle stranded balance. An account could become dormant due to a phone number being lost or a tourist’s account. We will need to develop a system to handle these funds in a fair manner in case the account owners ever come back for fund withdrawal.

In terms of regulatory framework, anti-money laundering (AML) and know-your-clients (KYC) requirements need to be updated to support the use of transferrable Verifiable Credentials (VCs). The legality of smart contracts and the suitability of cryptographic techniques will also need to be ascertained. 

What is the next step for Arta’s development in blockchain payment?

Arta TechFin continues its effort to develop DLT payment in CBDC and stablecoin. One of the publicly announced developments is the application of DLT payment in settling tokenized investments. Arta collaborates with US-based Chainlink Labs in developing a regulated fund token for Arta clients with key features such as cross-chain interoperability, proof of reserve, and smart NAV.

Arta is also in the advanced research stage on developing trusted verifiable credentials for regulated, DLT financial applications. VC serves as a critical component for seamless application in the DTL financial system. VC shall enhance efficiency in carrying out best-practice regulatory standards in AML, KYC, and suitability processes. Both investors and FIs shall benefit from enhanced compliance control and reduced repetitive entries in onboarding.

About Eddie FW Lau 

Eddie FW Lau is the Co-Chief Executive Officer and Executive Director of Arta TechFin Corporation Limited. Under his leadership in distributed ledger technology fintech platform development, Arta TechFin received the Best Technology Award in the Central Bank Digital Currency track of Global Fast Track 2022 organised by Invest HK and Hong Kong Monetary Authority. The company completed Phase 1 of the HKMA’s e-HKD Pilot Programme with a proof-of-concept of executing programmable payment for atomic settlement of tokenized funds via a hypothetical e-HKD smart contract in October 2023. He was appointed as a member of the Task Force on Promoting Web3 Development of the HKSAR Government in July 2023.

About Arta TechFin

Arta TechFin is a regulated hybrid financial (HyFi) platform bridging traditional finance with blockchain-based financial systems via technology innovations. Its regulated one-stop solution enables corporates, financial institutions, and family offices to access traditional assets and digital assets. 

Arta, through its various subsidiaries, is licensed under the Hong Kong Securities and Futures Commission. Other licenses include Hong Kong Stock Exchange participants, insurance brokerage licenses, trustee licenses, and money lending licenses in Hong Kong as well as Eurex and Chicago Mercantile Exchange participants in Germany and the US.

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Keywords: DLT, tokenization, CBDC, stablecoin, settlement
Categories: DeFi & Crypto & Web3
Companies: Arta TechFin
Countries: World
This article is part of category

DeFi & Crypto & Web3

Arta TechFin

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