Digital money is gaining wide currency around the world, thanks to huge strides in state-of-the-art technology and a slowdown in the use of cash. Besides the sand dollar in the Bahamas – the first country to launch a Central Bank Digital Currency (CBDC) – and the eNaira in Nigeria, over 100 countries are exploring the implementation of CBDC. China, for example, already has a successful e-CNY pilot programme up and running that extends to 260 million people.
The Hong Kong Monetary Authority (HKMA), which has been exploring CBDC since 2017, announced its policy stance on e-HKD in September last year. The e-HKD Pilot Programme was commenced in mid-May this year to examine the use cases, as well as implementation and design issues relating to e-HKD.
As a new electronic form of central bank money, e-HKD could potentially have a major impact on Hong Kong, boosting the city’s role as an international financial centre and its competitiveness in the global payment arena. However, there are challenges to consider too, such as legal, cybersecurity and data protection.
Sixteen firms from the city’s financial, payment and technology sectors are participating in the first round of pilots for 2023. The participants, some in groups, are working on 14 pilots spanning six major categories, including full-fledged payments, programmable payments, offline payments, tokenised deposits, settlement of Web3 transactions and settlement of tokenised assets.
“These innovative use cases proposed by the industry truly open our eyes to new possibilities of what central bank money can do, and how e-HKD can potentially benefit the general public and businesses in Hong Kong,” said Nelson Chow, Chief Fintech Officer, HKMA. “We aim to share the key learnings of the Pilot Programme at this year’s Hong Kong FinTech Week in November.”
The possible introduction of e-HKD into the city’s financial system could bring far-reaching benefits to the city’s fintech development. In fact, future-proofing Hong Kong for CBDCs is one of the five focus areas put forward by the “Fintech 2025” Strategy, unveiled by the HKMA in June 2021 to drive fintech development in Hong Kong, dovetailing with the needs of a rapidly digitalizing economy.
“The e-HKD has the potential to make payments faster and more efficient while supporting the development of digital economy. With appropriate functionalities and attributes, e-HKD could help position our city for possible challenges from new forms of money,” Chow explained. He also pointed out that the potential programmability aspect of e-HKD could also enable innovative applications like smart contracts.
“Being ‘programmable’ means that commands can be executed based on pre-set conditions, which allows broader use cases of e-HKD to be developed,” he elaborated.
Chow also explained the differences between e-HKD and other stored value facilities (such as Octopus, Alipay and WeChat Pay). Referring to the HKMA’s discussion paper titled “e-HKD: A Policy and Design Perspective” published in April last year, he said that e-HKD would be an electronic form of central bank money and part of the monetary base like notes and coins in circulation.
“The e-HKD would be a liability of the central banking institution, while commercial money like stored value facility float is the liability of the commercial entity. There is a fundamental difference,” he pointed out. “The HKMA is exploring e-HKD mainly as a potential means to fuel innovation in a digital economy. Given the already vibrant retail payment landscape in Hong Kong, we understand clearly that the decision to implement e-HKD would very much depend on whether it can make payment more efficient and convenient than the existing payment methods, and whether it can open up new business opportunities.”
Chow reiterated that the experiences from the Pilot Programme would be crucial in informing the HKMA’s policy decision. “We are exploring with retail payment market participants whether and how e-HKD can fill any gaps that might be present in the existing market,” he stated.
However, there are several challenges and aspects to consider when launching a retail CBDC (rCBDC). “The e-HKD is not and should not be merely a technology project. Its possible implementation would entail far-reaching implications on a wide range of issues relating to areas such as legal, regulatory, policy, financial stability, privacy, cybersecurity and interaction with existing payment methods,” Chow said, adding that careful and extensive studies are required before deciding whether to launch e-HKD, and if so, what the road map should be.
When asked if customers can feel safe about using e-HKD, he said that rCBDC is a digital form of physical coins and notes issued or backed by a central banking institution. It is recorded in the central banking institution’s account and therefore is free of credit risk.
“That said, there are potential risks of implementing rCBDC,” Chow added. “In the context of Hong Kong, we will need to make sure that adequate safeguards are imposed to address those risks so that e-HKD, if implemented, would be a safe form of money in the eyes of the public.”
Regarding the timeline for subsequent pilot programmes, Chow said an iterative process would be followed, with each iteration lasting for about a year. It is expected that more rounds of pilots with the industry will be conducted in the future.
The HKMA is also planning to establish a CBDC Expert Group to foster closer government-industry-academia collaboration on CBDC research. The plan is to bring together leading professors from local universities, with top-notch experts coming from different fields, such as computer science, business and law.
“Going forward, the HKMA will work with these experts to study important issues such as privacy protection, cybersecurity and interoperability, as well as other technical and business aspects surrounding CBDC. While members of the Expert Group do not hold any formal advisory role, they will provide us with valuable insights and contribute to our future deliberations on CBDC.”
On the question of when e-HKD will finally be introduced, Chow said that while no decision has been made on whether and when to introduce e-HKD, the HKMA has been paving the way for possible implementation of e-HKD in the future through a three-rail approach.