Financial digitalization has become a trend, and countries around the world are trying to explore and launch their own "central bank digital currency" (CBDC) solutions and their feasibility. In addition to the upcoming announcement of its e-HKD pilot programme, the Hong Kong Monetary Authority (HKMA) has also been actively working with a number of Asian central banks to jointly promote a pilot scheme for digital currencies.
Conduct six major areas of test application scenarios
What is e-HKD?The e-Hong Kong dollar (e-HKD) is Hong Kong's own central bank digital currency (CBDC), and CBDC refers to the legal tender issued by the ** banks in various places by digital methods, which has not yet been fully defined, and the application, design and implementation of the CBDC are different. In terms of application, CBDC can be broadly divided into "wholesale central bank digital currency" that is restricted to banks and other related financial institutions, or "retail central bank digital currency" that meets the public's daily consumption payment needs.
In fact, as early as 2017, Hong Kong** began to study whether to launch e-HKD. In early 2022, the HKMA indicated that it would first lay the technical and legal groundwork to amend existing legislation or create new legislation, depending on the situation, and also commence cross-border payment trials. In October last year, the HKMA announced that it had successfully completed a six-week trial of the mBridge cross-border CBDC in collaboration with the Hong Kong Centre of the Bank for International Settlements Innovation Hub, the Bank of Thailand**, the Digital Currency Institute of the People's Bank of China and the Bank of the United Arab Emirates**, with 20 banks from four jurisdictions using the Mbridge platform to conduct more than 160 payments and foreign exchange transactions in currencies including the Digital UAE Dirham (e-AED) and the Digital Chinese Yuan (e-CNY). ), e-Hong Kong dollar (e-HKD) and digital baht (e-THB), totaling more than 1HK$7.1 billion.
The Hong Kong Monetary Authority (HKMA) launched the "e-HKD" pilot scheme in May this year, and 16 selected companies from the financial, payment and technology sectors will conduct the first round of trials this year to study the potential use cases of e-HKD in six areas, including full payment, programmable payment, offline payment, tokenised deposits, third-generation Internet (web3) transaction settlement and tokenised asset settlement, but no decision has yet been made on whether to officially launch e-HKD.
The HKMA is also preparing for the possible future launch of retail-level CBDC under a three-track approach, with the Pilot Scheme as an important part of Track 2, which is expected to be preceded by a series of trials to explore the application scenarios of e-HKD, as well as the related implementation and design issues. The selected companies include Alipay Financial Services (HK) Limited, Arta-Emali HK Limited, Bank of China (Hong Kong), CCB Asia, Fubon Bank Hong Kong, and Ripple Labs Inc, Giesecke+Devrient, Standard Chartered Bank Hong Kong, Hang Seng Bank, HSBC, Visa Incămastercard asia/pacific pte. ltd., ICBC Asia, Boston Consultants, HKT Payment Limited and ZA Bank.
Be prepared for opportunities
Now that the pilot scheme is in full swing, is the implementation of e-HKD in Hong Kong good or bad?Liu Yijian, co-chief executive of HSBC Asia Pacific, said in a public statement that Hong Kong's implementation of e-HKD is certainly good. He said the HKMA is conducting in-depth research on CBDC at both the wholesale and retail levels.
He said that the digital yuan (e-CNY) is currently the world's most advanced central bank digital currency and sets the standard for other central bank digital currencies. Although the main focus is on the mainland at this stage, the People's Bank of China has made it clear that it wants to expand its use internationally. Hong Kong should seize the once-in-a-lifetime opportunity for the development of the digital yuan.
Leung Wing-hei, founder and CEO of blockchain research, also believes that e-HKD, the retail central bank digital currency, is like coins and banknotes issued by the central bank, which are recorded in the central bank's account books, so the credit risk is zero. Deposits placed in banks or e-wallets are recorded in the books of financial institutions such as banks or issuing operators. To put it simply, bank failures may result in loss of money, but of course, Hong Kong's financial institutions are sound, and this risk is low.
He added that in addition to credit risk, the use of e-HKD can enhance transaction efficiency. Trading in digital form allows for real-time clearing and settlement, which reduces the time cost of the transaction. Taking tokenized asset settlement as an example, according to Fubon Bank and its partner Ripple Labs, assets such as real estate can be tokenized and used as collateral for loans, thereby speeding up asset conversion, increasing loan value, and approving loans immediately, and lenders can use the relevant digital loans in real time.
He also emphasised that if e-HKD can be programmed, it can promote financial innovation. Through the open API, third-party fintech companies and developers can build a variety of innovative financial applications and services based on e-HKD, including smart contracts, **chain finance, cross-border payments, etc., in application scenarios such as granting**, merchant reward schemes, prepayment services and investments, etc., which will help promote the modernization and development of the financial system.
There are derivative risks and challenges
However, Leung also believes that the launch of e-HKD will have derivative risks and challenges, and it is important to pay attention to them. First of all, he points out, security is critical. Since e-HKD is a cryptocurrency based on blockchain technology, it is essential to ensure its security during trading and storage. Any security breach or system failure may result in the theft or loss of digital assets.
Secondly, although the potential application of e-HKD is very widespread, the actual adoption will take time and effort to promote. The acceptance of Hong Kong people, market demand and the co-operation of related industries will all affect the success of e-HKD. According to a survey conducted by HKUST in October last year, nearly 90 percent of respondents had heard of digital currencies or assets, but nearly 80 percent had never used or held themIn addition, only about one-third and half of the respondents have heard of central bank digital currency (CBDC), indicating that the public's awareness of e-HKD still needs to be increased.
In addition, laws and regulations, privacy protection, and whether the currency can be programmed will also have a limiting impact on how it can be used. The extent to which participants (e.g. e-payment operators, banks and merchants, etc.) have access to user data (e.g. user identity and transaction history) in order to comply with anti-money laundering, counter-terrorist financing, consumer protection and other requirements still needs to be determined in depth before it can be determined.