The Hong Kong Monetary Authority (HKMA) has issued a discussion paper inviting views on policy and design questions surrounding the potential introduction of a retail central bank digital currency (CBDC).
Hong Kong has yet to commit to launching an e-HKD (Hong Kong dollar) despite China, of which Hong Kong is a part, motoring ahead with trials of its e-CNY (or ‘digital yuan’). The HMKA has been working with the People’s Bank of China on CBDC research, as well as with other central banks on the potential of wholesale CBDC for cross-border payments.
After announcing its ‘Fintech 2025’ strategy in June last year, the HKMA launched a project to study the prospect of introducing an e-HKD, releasing a technical white paper – ‘e-HKD: A Technical Perspective’ – in October.
The newly released paper, ‘e-HKD: A Policy and Design Perspective’, takes a broader lens, focusing on the overall potential benefits and challenges of introducing a CBDC; design considerations such as the issuance mechanism; interoperability with other payment systems; privacy, data protection and legal considerations; as well as use cases.
“This paper marks another milestone in our exploration for the e-HKD,” said HKMA chief executive Eddie Yue in a press release announcing the 42-page document, which concludes with a 12-strong ‘list of issues’ (Global Government Fintech reproduces these at the end of this article) that respondents have exactly one month to address (the deadline is 27 May 2022). “The policy and design considerations set out in the paper have reflected latest international developments as well as the unique features of the financial market of Hong Kong.”
CBDC as way to ‘fuel innovation’
The paper is published today (27 April) by the HKMA alongside a Yue-authored article entitled ‘Four essential Q&As for e-HKD’. These questions are: ‘how do rCBDCs [retail CBDCs] differ from the existing e-payment methods?’; ‘what kind of rCBDC does Hong Kong need?’; ‘what are the potential challenges and technical issues?’; and ‘is e-HKD all set to be launched?’
Yue refers to mainland China – as well as the Bahamas, which launched its ‘Sand Dollar’ in 2020, and Sweden, which has recently issued its ‘E-krona pilot Phase 2’ report – as CBDC ‘pioneers’, albeit stating that their CBDC ‘motivations’ differ. In mainland China, CBDC ‘aims to improve the efficiency of central bank payment systems and to provide a back-up to retail payment systems operated by big technology companies’, whereas in the Bahamas, CBDC promotion has focused on financial inclusion, Yue writes. Hong Kong ‘does not have a problem of financial inclusion’, he states, but instead is ‘exploring e-HKD mainly as a potential means to fuel innovation in a digital economy, and help position Hong Kong for possible challenges from new forms of money (e.g. stablecoins)’.
Yue states that ‘unless e-HKD can address some pain points of the current e-payment services, or is much more convenient than the existing e-payment options, it would be hard for e-HKD to be embraced by the public among the plethora of retail payment options in Hong Kong’.
His article also addresses privacy and data protection arrangements, with Yue stating that ‘a certain degree of traceability would be inevitable’ and that the HKMA ‘need[s] to carefully consider the extent of information access (e.g. user identity and transaction history) to be given to different parties (e.g. central bank, e-wallet operators, banks and merchants).’
In addition, he notes that there is a need to consider whether e-HKD should be made ‘programmable’ (able to execute commands based on pre-set conditions). ‘We need to be wary of potential risks like programme glitches, cybersecurity, etc. As such, it may be more pragmatic to allow for programmability in the wallet of e-HKD rather than in e-HKD itself. Furthermore, should e-HKD be programmable, the public might question whether it is as trustworthy as cash,’ he states.
Yue’s article concludes with him stating that ‘even if we eventually decide to introduce e-HKD, there would still be a long way to go before it can be fully launched for general usage’. The HKMA expects to deliver a ‘policy stance and intention’ later this year.
12 QUESTIONS ON A POTENTIAL DIGITAL HONG KONG DOLLAR
- Do you agree that e-HKD can bring potential benefits as described? Do you see other potential benefits?
- How can e-HKD implement the suggested use cases better than the existing e-payment means? Apart from programmability, what other technologies would bring new use cases for e-HKD?
- 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?
- Do you agree with the description of challenges brought by e-HKD? Do you see other challenges? Are there any other measures that can mitigate the adverse impacts of e-HKD? How would these measures affect the attractiveness of e-HKD?
- How can e-HKD assist in the detection of illicit activities while preserving user privacy at the same time?
- What types of financial institutions should be responsible for distributing e-HKD? Should the functionalities of the e-HKD wallet be allowed to differ among the financial institutions?
- How should e-HKD be designed to achieve interoperability with existing payment systems? Are there any technological barriers that would prevent the acceptance of e-HKD?
- Should there be different types of e-HKD wallets based on the level of personal information required? If so, what should the corresponding transaction/holding limits for each type of wallet be?
- Are there more design considerations to be included in the e-HKD study? Would you be able to identify some trade-offs around such considerations?
- How could the private sector contribute to the e-HKD journey?
- Are there any other legal considerations, in addition to those discussed in this paper, which should be considered in designing a legally robust e-HKD?
- Are there any other policy considerations which are relevant to e-HKD but not covered in this discussion paper?
Source: p39-p40 of the HKMA’s 42-page paper
FURTHER READING
=>>> Global Government Fintech’s dedicated ‘Digital Currencies’ section <<<=
‘Hong Kong launches “Fintech 2025” vision’ – our news story (8 June 2021) on the unveiling of the HKMA’s fintech strategy as it aims to encourage the financial sector to adopt technology ‘comprehensively’
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