The Hong Kong Monetary Authority (HKMA) recently released a Discussion Paper: “e-HKD: A Policy and Design Perspective.” In the Chamber’s response, we recognize the need to consider introducing a digital Hong Kong dollar, and welcome measures that could add value to the city’s role as an international financial hub. 

At the same time, it should be recognized that retail central bank digital currencies are still at an early stage of development, so careful consideration should be given to the introduction of an e-HKD to optimise its benefits while minimising risks.  

Do you agree that e-HKD can bring potential benefits? 

We agree that e-HKD offers a host of advantages as described in the Discussion Paper, namely:

•  improving the availability and usability of central bank money 
•  positioning for challenges of new forms of money
•  supporting innovation and meeting future payment needs in a digital economy 
•  improving resilience and efficiency of the payment system 
•  reinforcing the transmission of monetary policy

An e-HKD would also be useful in addressing money-laundering activities by enhancing transparency in transactions, as well as promoting healthy competition in the digital payments space. It would also save costs that are incurred in the storage and distribution of paper notes.

An e-HKD could also help reinforce Hong Kong’s standing as a smart city and promote tourism by providing users with an alternative to traditional payments. 

However, as noted in the Discussion Paper, the benefits arising from e-HKD are less obvious in the case of mitigating credit risk for commercial entities and promoting financial inclusion. This is due to factors including the city’s mature payment ecosystem, a robust Deposit Protection Scheme, and continued demand for physical cash. 

How do you see the demand for e-HKD as a means of payment? What other design features would promote the use of e-HKD? 

As there is already a variety of cash and non-cash payment solutions available in Hong Kong, there may be less incentive for the public and businesses to adopt e-HKD. As such, e-HKD should offer a more compelling value proposition and distinct benefits such as convenient usage, reduction or removal of transaction costs and flexibility with adoption. 

Other features that could enhance the attractiveness of e-HKD as a payment option include exchangeability and usability in cross-border transactions.

What are the challenges that could be brought by e-HKD? 

We agree with the potential challenges mentioned in the Discussion Paper that e-HKD might pose to financial stability, bank funding, and the role of banks as intermediaries. Widespread adoption of the e-HKD in Hong Kong may also be difficult given the convenience attached to existing cash and digital payment offerings. 

Although we note that it is not the intention of the HKMA to substitute existing payment options with e-HKD, there is a risk of unintended competition with existing payment services such as electronic wallets. 

How can e-HKD assist in the detection of illicit activities while preserving user privacy?

Hong Kong has a robust anti-money laundering and counter terrorist financing regulatory framework. Should the functionality of e-HKD be expanded to include the combat of illicit activities while also maintaining user privacy, consideration could be given to a tiered approach to regulating payments. This could be similar to that stipulated under the Stored Value Facility License where low value transactions are exempted from KYC/AML measures.

Adopting a mechanism whereby transactions conducted with e-HKD do not go through third-party payment providers would also help to protect users’ data privacy.

What types of financial institutions should be responsible for distributing e-HKD? 

We suggest that all licensed financial institutions be eligible for distributing e-HKD, as e-wallet services provided by such authorized institutions would better safeguard the interests of users. We also suggest that in the interest of maintaining a level playing field, there should be consistency in functionalities with the e-HKD wallet across all participating financial institutions. A standardised approach would also avoid user confusion.

Are there more design considerations that could be included in the e-HKD study? 

As Hong Kong already has a mature payment infrastructure, we suggest capitalising on this by integrating e-HKD into existing digital payment applications. In particular, consideration could be given to integrating e-HKD into the Faster Payment System, which provides extensive support to local inter-bank electronic transactions. 

How can the private sector contribute to the e-HKD journey?

We believe that public-private sector collaboration is crucial for driving the successful development of e-HKD, with the private sector contributing to the innovation and delivery of the digital currency. We further suggest that attention be given to enhancing the interoperability of e-HKD with existing payment models based on consultations with operators of stored value facilities.