Four essential Q&As for e-HKD

inSight

27 Apr 2022

Four essential Q&As for e-HKD

In recent years, crypto-asset markets have grown significantly, with the Non-Fungible Tokens (NFT) issued by different institutions and individuals prompting a new wave of crypto-asset investment in recent months.  Although these crypto-assets, including the so-called crypto-currencies, are getting much hype, they have very limited use in daily life, and their risks may not be fully understood by the general public.  The HKMA has been reminding the public about the risks of these assets, and keeping track of the latest market developments in order to formulate an appropriate regulatory approach.  For example, in January this year, the HKMA issued a discussion paper on “Crypto-assets and Stablecoins”, which invited public views on how to formulate a flexible but pragmatic approach to regulating stablecoins.

At the same time, like many other central banks, the HKMA is actively studying the feasibility of Central Bank Digital Currency (CBDC).1  We actually started our CBDC journey in 2017, and have been actively studying retail CBDC (rCBDC) in the past year, covering the development potential and feasibility of e-HKD from both the technical and policy perspectives.  A technical whitepaper was released late last year. 

Apart from many fintech-related technical issues, e-HKD also involves numerous complicated policy issues.  Having regard to the wide range of policy issues to be addressed, the HKMA released a new discussion paper today to solicit feedback from stakeholders as inputs to the policy considerations on the feasibility of e-HKD.  We briefly summarise below four key issues concerning the future direction of e-HKD to facilitate discussion.

1. How do rCBDCs differ from the existing e-Payment methods?

e-Payment tools (such as Faster Payment System (FPS), Octopus, mobile e-Wallets, etc.) have become an essential part of our daily lives.  So, how do they differ from rCBDC?

Conceptually, rCBDC is just like physical coins and notes issued or backed by the central bank. It is recorded in the central bank’s account and therefore is free of credit risk.  Meanwhile, the money stored in banks or in e-Wallets is recorded in the account of financial institutions like banks or e-Wallet operators, hence its convertibility to cash depends on the risk of the financial institutions.  Although in practice such credit risk is extremely small in the Hong Kong context given our robust financial system, and few people ever think about it, there are indeed some technical differences in the strict legal sense. 

Currently, Mainland China, Sweden and the Bahamas are pioneers in CBDC, but their motivations behind are different. For example, in Mainland China, CBDC aims to improve the efficiency of central bank payment systems and to provide a backup to retail payment systems operated by big technology companies. In Sweden, where the usage of physical cash is declining, the introduction of CBDC can increase the overall circulation of central bank money.  In the Bahamas, where the geography makes it relatively costly to move physical cash around, the promotion of e-Payment could not only lower the costs of financial services, but also promote financial inclusion.  Globally, most CBDC projects are still in the research stage.  Considering the significance of a currency and its important functions, an in-depth and comprehensive study is essential before any central bank would introduce rCBDC, such that public confidence in the currency would not be shaken. 

2. What kind of rCBDC does Hong Kong need?

In Hong Kong, we have a wide variety of retail payment services – there are different payment options (e.g. credit cards, FPS, Stored Value Facilities (SVFs)) for the public to choose from, and they are in healthy competition.  We do not have a problem of financial inclusion (which the Bahamas had) that calls for the issuance of CBDC, nor declining usage of cash (which Sweden had), so why do we still need to explore e-HKD?

The HKMA 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). While rCBDC obviously carries a lot of innovative potential, its practical application in Hong Kong has yet to be examined.  To local citizens, e-HKD would not be attractive if it does not have any visible advantage.  Hence, 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.   

3. What are the potential challenges and technical issues?

First of all, although it is not the HKMA’s intention, the issuance of e-HKD may be perceived to be intensifying competition in the retail payment landscape.  Second, if a lot of people convert their money from bank deposits to e-HKD, this could impact on banks’ funding.  While adequate safeguards (e.g. maximum account balance, daily conversion and transaction limits of e-HKD) could be imposed to address these potential risks, an overly restrictive scheme may discourage potential users of e-HKD. Hence there is a need to strike a balance between managing risk and facilitating use by the general public. 

Another issue facing e-HKD is how the authority should design its privacy and data protection arrangements.  If the e-HKD is fully anonymous, its use would feel the same as coins and notes, but this anonymity would fall short of international regulatory requirements on Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT).  Hence, a certain degree of traceability would be inevitable, and we need 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, we need to consider whether e-HKD should be made “programmable”.  Being “programmable” means that it can execute commands based on pre-set conditions, in turn helping e-HKD develop broader use cases, although we also 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.

4. Is e-HKD all set to be launched?

The HKMA has not yet made any decision on the introduction of e-HKD.  As mentioned above, when setting the development and regulatory approach for CBDC, there is a need to consider carefully the trade-offs, in particular the pros and cons from the policy perspective.  For this reason, the HKMA released a new discussion paper today with details on the policy considerations involved in e-HKD. We look forward to receiving feedback from stakeholders.  A number of questions have been raised in the document, such as what use cases can be better implemented by e-HKD than the existing e-Payment options? What design features can facilitate the future digital economy and innovation in Hong Kong? And how should e-HKD achieve interoperability with the current payment systems?

Currently, most central banks across the globe are still studying CBDC, with only very few of them having decided to launch CBDC or expressed a policy stance.  It is worth noting 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 e-CNY issued by the People’s Bank of China is still at the pilot stage.  The US recently indicated that it would research into development of a US CBDC, if it is in their national interest.  The European Central Bank is conducting phases of investigation and testing that would last for five years, and expects to make a decision on whether to introduce CBDC by the end of 2026.  The Bank of England commenced its public consultation two years ago, but has recently indicated that even if it eventually decides to launch rCBDC, it would only be able to launch it between 2025 and 2030 at the earliest.  The above show that, careful and extensive studies are required before deciding whether to launch CBDC, and if so, what the road map should be. 

Invitation for comments

The issuance of the discussion paper today serves as an important milestone for the e-HKD study.  Your comments will help lay a more solid foundation for the study and contribute to the HKMA’s policy deliberation for facilitating innovation while maintaining monetary and financial stability.  All these will help strengthen Hong Kong’s status as an international financial centre.  Members of the public and the industry are welcome to submit their responses by email to ehkd_feedback@hkma.gov.hk on or before 27 May 2022.  After analysing the responses received, we hope to deliver our policy stance and intention later this year.

 

Eddie Yue
Chief Executive
Hong Kong Monetary Authority

27 April 2022

 


1 See Boar C. and Wehrli A. (2021, January.) “Ready, steady, go? – Results of the third BIS survey on central bank digital currency”. BIS Papers No.114.

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Last revision date : 27 April 2022