Project Dynamo: catalysing innovation for SME growth

A new prototype developed as part of Project Dynamo explored how institutional investors can be encouraged to finance small and medium-sized enterprises (SMEs) through the programmability and transferability of digital trade tokens on a public blockchain. The prototype makes use of non-fungible tokens and smart contracts for SME finance. It builds on the 2020 Trade Finance TechChallenge, a joint initiative conducted by the BIS Innovation Hub Hong Kong Centre and the Hong Kong Monetary Authority (HKMA). This provided insights into the needs of and challenges faced by SMEs when accessing trade finance.

SMEs are the lifeblood of most, if not all, economies. SMEs account for more than 90% of all businesses, contribute to more than 50% of employment globally and play a significant role in the global supply chain. Despite such important roles, SMEs regularly face great difficulties in accessing financing, especially on affordable terms. The same research estimates that about half of these companies have no access to formal credit. In developing countries alone, micro, small and medium-sized enterprises (MSMEs) have unmet financing needs of over USD 5.2 trillion every year, equivalent to 1.4 times of the current level of global MSME lending. The Covid-19 pandemic has only exacerbated the situation, leaving millions of businesses on the brink of bankruptcy. Supporting SME development is therefore a high priority for many governments and central banks around the world.

In respect to programmability, the project demonstrated the use of an electronic bill of lading as a condition for triggering payment - a "marriage" between the digitalisation of the trade world and the digitalisation of the finance world. In addition, the prototype showcased the use of digital identity (see also Corporate digital identity: no silver bullet, but a silver lining) for conducting due diligence on the SMEs. The use of Environment, Social and Governance conditions for triggering payment was also explored with an aim to facilitate the building of a greener and more socially responsible supply chain. The project involved private sector participants including Linklogis International, Standard Chartered, RD Technologies, MioTech and Simmons & Simmons.

Inspired by the potential use case for the SMEs, the Hong Kong Centre, supported by Quinlan & Associates, also conducted a market landscape study on the potential wholesale use cases of central bank digital currencies, deposit tokens, and stablecoins. The study explored the adoption challenges and broader market development outlook for key market participants, based on interviews with key stakeholders at global banks, payment companies, academic/policy institutions, law firms, accountancies, inter-governmental organisations, and stablecoin issuers.

This project will provide in-depth insights into the relevant technologies and proposed applications for central banks, policy makers and standard setters, the banking industry as well as various market participants and stakeholders. Demonstrating the "art of the possible" and drawing out the related legal, regulatory, and commercial considerations will catalyse further discussions on the associated benefits and risks of the technologies involved to help promote responsible innovation that would benefit the SMEs, the real economy and make a positive difference. 

In the future our research will extend into related topics such as decentralised identifiers and the interoperability of digital payment methods. 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. The BIS Innovation Hub is interested in hearing from companies and innovators with working solutions in these areas.

Project Advisor: Lucy Wong (Lucy.Wong@bisih.org)