The Hong Kong Monetary Authority (HKMA) has set out its next moves in its explorations of a potential central bank digital currency (CBDC) – an e-HKD (Hong Kong dollar) – including the launch of pilots.
Hong Kong has yet to commit to launching a CBDC despite China, of which Hong Kong is a part, making significant progress with its e-CNY (‘digital yuan’). But having analysed responses to two consultations, the HKMA announced this week that it will ‘at least start paving the way’ for possible future implementation of a Hong Kong CBDC.
In a newly released paper, the authority reveals it will proceed with what it terms a ‘three-rail’ approach. Rail one will aim to lay the technology and legal foundations for supporting implementation of a Hong Kong CBDC; rail two will see the HKMA take ‘deep dives into use cases as well as application, implementation and design issues relating to e-HKD’; and rail three will consolidate the outcomes of the first two rails for ‘more thorough implementation planning and will set the timeline for launching e-HKD’.
‘The HKMA considers it necessary to at least start paving the way for possible future implementation of e-HKD,’ states the ‘e-HKD: Charting the Next Steps’ paper.
‘While we will maintain an open mind in terms of the opportunities for the application of e-HKD to further enhance the existing retail payment landscape of Hong Kong, greater focus will be placed on getting ourselves prepared as best we can for use cases that may emerge out of the rapidly digitalising marketplace and the trend of increasing integration in the global payment landscape,’ explains the paper.
Timeline ‘subject to wide range of factors’
The 39-page update contains some details of the three-rail approach, as well as a summary of responses received during the two consultations (and brief HKMA comments on the responses).
For rail one, a plan will be formulated for developing the wholesale layer of a two-tier e-HKD system. In addition, the HKMA will identify and examine areas to prepare for legislative amendments, with a view to enabling the issuance of a digital form of fiat currency with legal tender status.
Under the second rail, which will run concurrently to the first rail, the HKMA will also conduct a series of CBDC pilots, saying that it wants to ‘deepen our research into application issues and gain actual experience through conducting a series of pilots with various stakeholders, including banks and the industry.’ Projects and tasks in the pipeline include access to e-HKD via an e-wallet, ‘industry engagements on retail CBDC use cases and design choices’.
Progress of rail three will depend on progress made under the first two rails, ‘as well as the pace of relevant local and international market development’. The paper states that ‘admittedly, it is difficult to project the timeline for rolling out e-HKD at this stage since it is subject to a wide range of factors’.
In respect of the two consultations, a technical paper released last October attracted 36 responses and a paper inviting views on policy and design questions (released in April this year) gained 39 responses.
“We welcome the positive feedback received and agreed with the respondents the need to take a deep dive into issues such as privacy protection and use cases,” said HKMA chief executive Eddie Yue in a press release summarising the authority’s e-HKD policy stance.
CBDCs’ privacy challenges
Privacy and data considerations associated with CBDC were addressed by Yue in April in an HKMA-published article titled ‘Four essential Q&As for e-HKD’. He stated that ‘a certain degree of traceability would be inevitable’ and that the authority ‘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).’
Data privacy is a challenge for CBDC designers worldwide – and a sensitive topic from a policy and political perspective. For example, it ranked as top priority in an European Central Bank (ECB) public consultation on the digital euro (whose results were published in January 2021). ECB executive board member Fabio Panetta has said that ‘full anonymity is not a viable option from a public policy perspective’. The ECB recently invited external experts for talks about the ‘large-scale application of privacy-enhancing technologies in settlement of retail payments’ (privacy-enhancing technologies are technologies that embody fundamental data protection principles). The Frankfurt-headquartered authority also worked alongside the Bank of Japan a couple of years ago to analyse a range of techniques aimed at balancing the confidentiality and auditability of payments in a distributed-ledger environment (this was known as ‘Project Stella’).
Separately in Hong Kong, an 88-page report titled ‘Advancing Hong Kong’s FinTech Ecosystem’ was published last month by Google Hong Kong in collaboration with Quinlan & Associates.
*** A draft digital assets bill that includes the introduction of strict disclosure requirements for ‘facilitators’ of the digital yuan in Australia has been proposed by New South Wales senator Andrew Bragg. Under his proposal, Chinese state-owned banks would be required to report on the use of digital yuan to the Reserve Bank of Australia and to banking regulator APRA. A consultation on the opposition politician’s draft private members’ ‘Digital Assets (Market Regulation) Bill 2022’ closes on 31 October.
‘Hong Kong and Israel examine CBDC cybersecurity resilience’ – our news story (20 June 2022) on the HKMA and Bank of Israel teaming up to research the cybersecurity aspects of CBDCs in a project being led by the Bank for International Settlements (BIS) Innovation Hub’s Hong Kong centre
‘Hong Kong consults on retail central bank digital currency’ – our news story (27 April 2022) on the HKMA issuing its discussion paper inviting views on policy and design questions surrounding the potential introduction of a retail CBDC
‘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’