Central Bank Digital Currency (CBDC)

The HKMA conducted two rounds of market consultations on issuing an e-HKD, with one on high-level technical designs, and the other on key policy and design issues. The HKMA published a paper in September 2022 to provide its initial views on how to best position Hong Kong for future developments in the sphere of digital currencies and payments.

Technical Perspective

A technical whitepaper titled “e-HKD: A technical perspective” was published in October 2021 to explore potential technical design options for issuing and distributing a retail CBDC. This whitepaper builds on the model for a retail CBDC as jointly investigated by the HKMA and the BISIH Centre in Hong Kong. It is the first among similar papers published by central banks to unveil a technical architecture that includes a ground-breaking privacy preservation arrangement that allow transactions to be traced in a privacy-amicable manner.

e-HKD: A technical perspective

Policy and Design Perspective

A discussion paper titled “e-HKD: A Policy and Design Perspective” was published in April 2022. It discusses the potential benefits and challenges of an e-HKD, various design considerations (e.g. issuance mechanism and legal considerations), as well as the potential use cases for an e-HKD.

e-HKD: A Policy and Design Perspective

Policy Stance and Three-Rail Approach

Taking into account the findings of the study and the feedback received from these two rounds of market consultation, the HKMA published a position paper titled “e-HKD: Charting the Next Steps” in September 2022 to set out its policy stance on an e-HKD. The paper outlined a three-rail approach that will be adopted to pave the way for the possible implementation of an e-HKD in Hong Kong.

e-HKD – Charting the Next Steps

Three-rail approach for the potential implementation of an e-HKD:

Rail 1 aims to lay the technology and legal foundations for supporting the future implementation of an e-HKD.

Rail 2 runs in parallel to Rail 1, and takes deep dives into potential use cases, and implementation and design issues relating to an e-HKD. In particular, the e-HKD Pilot Programme was launched in November 2022 as a joint effort between the HKMA and the industry to explore and evaluate the commercial viability of potential use cases for an e-HKD as well as to gain actual experience, through a series of pilots conducted with the industry.

Rail 3 will consolidate the outcomes of Rail 1 and Rail 2 for more thorough implementation planning, and will set the timeline for launching an e-HKD. The progress of Rail 3 will depend on the actual progress made under Rail 1 and Rail 2, as well as the pace of relevant local and international market development. The HKMA has not yet reached a policy decision on whether or when to introduce an e-HKD.

The HKMA launched the e-HKD Pilot Programme, a key component of Rail 2, in November 2022. The HKMA has also developed an e-HKD Sandbox to enable participants of the e-HKD Pilot Programme to accelerate their prototyping, development and testing of their use cases, as well as to gain actual experience.

Phase 1 of the e-HKD Pilot Programme commenced in May 2023, and took deep dives into potential domestic and retail use cases in six categories: full-fledged payments, programmable payments, offline payments, tokenised deposits, settlement of Web3 transactions, and settlement of tokenised assets. 16 firms from financial, payment and technology sectors were selected to participate.

The HKMA published the “e-HKD Pilot Programme Phase 1 Report” in October 2023 to discuss the key findings, learnings, and the HKMA’s assessment of the conducted pilots. The pilots showed that there were three areas where an e-HKD could potentially add unique value to the current ecosystem, namely: programmability, tokenisation, and atomic settlement. The HKMA recognises that these pilots were conducted on a small scale within a controlled environment. Therefore, further investigation and evaluation would be required to determine if these benefits can be realised at a larger scale in real-life applications.

e-HKD Pilot Programme Phase 1 Report

The HKMA launched Phase 2 of the e-HKD Pilot Programme in March 2024, inviting industry participants to submit innovative use cases for an e-HKD. Building on the success and experience of Phase 1, the next phase will delve deeper into select pilots from Phase 1 where an e-HKD could add unique value, namely programmability, tokenisation and atomic settlement, as well as explore new use cases that have not been covered in the previous phase.

Phase 2 of the e-HKD Pilot Programme is expected to last until mid-2025 to provide participants sufficient time to test and evaluate their proposed use cases.

Application Process

Interested organisations should complete the application form and submit it via email to the HKMA at cbdc@hkma.gov.hk with the subject “e-HKD Pilot Programme Phase 2 - Application ([Your Company Name])” on or before 17 May 2024. The completed form should be accompanied by relevant supplementary materials (e.g. project proposal, business plan, etc.) to substantiate your application. Organisations are welcome to submit multiple use cases.

Applicants, including pilot participants of Phase 1, intending to submit use cases based on those explored in Phase 1 are strongly encouraged to outline in their submissions new insights they expect to attain in Phase 2. This could entail, for example, a deeper analysis into implementation issues that would be encountered in rolling out the use cases at scale.

The HKMA expects to hold interviews with selected applicants in May/June 2024. Further details will be communicated to the selected applicants in due course.

Assessment Criteria for Use Cases

Submitted applications will be assessed according to the following criteria:

• Forefront of innovation: The solution should showcase innovative elements and differ significantly from existing market offerings (such as a new business model, market, or version of an existing product);
• Customer-centric: The solution should enhance the overall customer experience or solve their existing pain points and, preferably, should have received some level of market validation (e.g. through partnership with household names);
• Readily testable: The solution should allow for market testing with select group(s) of customers. Relevant risks should be identified with appropriate mitigating measures in place, and sufficient resources including capital and manpower should be committed;
• Regulation-compliant: The solution should be compliant with existing licensing requirements; and
• Hong Kong-centric: The solution should maximise the potential use of an e-HKD.

Project Aurum

In relation to retail CBDCs, the HKMA previously collaborated with the BISIH Centre in Hong Kong and the Hong Kong Applied Science and Technology Research Institute on Project Aurum to create a prototype two-tier CBDC system. This project was the BISIH’s first retail CBDC project, and it studied the high-level technical design for a retail CBDC. Project Aurum resulted in the creation of a prototype two-tier CBDC system, which comprised a wholesale interbank system and a retail e-wallet system. A report was published in October 2022.

This project laid a solid foundation for the HKMA’s subsequent retail CBDC projects (such as Project Sela), and also helped shed light on the CBDC journey for other central banks by making the source code and technical manuals accessible to all central banks.

Project Aurum: A Prototype for Two-tier Central Bank Digital Currency (CBDC)

Project Sela

The HKMA collaborated with the Bank of Israel and the BISIH Centre in Hong Kong on Project Sela. This project was a joint experiment testing the feasibility of a retail CBDC architecture in promoting competition and innovation in digital payments amongst private sector intermediaries, with analysis in the areas of policy, cybersecurity, legal and technology. The proposed architecture, established as a proof of concept, allowed such intermediaries to connect directly to the CBDC ledger of the central bank. A report was published in September 2023.

This project demonstrated that the proposed architecture could feasibly promote competition and innovation in digital payments, whilst attaining desirable levels of access and cybersecurity. In addition, it demonstrated that public-private partnerships could support the development of a vibrant ecosystem of private sector intermediaries.

Project Sela: an accessible and secure retail CBDC ecosystem