Financial digitization has gained momentum globally, with countries exploring the viability of launching their own central bank digital currencies (CBDCs). Hong Kong, as an international financial hub, is actively pursuing this trend. Alongside the upcoming pilot program for the "Cyber Hong Kong Dollar," the Hong Kong Monetary Authority has engaged in substantial efforts, including collaborations with several Asian central banks, to advance the pilot program.
Testing application scenarios across six categories
The concept of the Digital Hong Kong Dollar, or e-HKD, represents Hong Kong's proprietary CBDC (Central Bank Digital Currency). CBDCs are digital forms of legal tender issued by central banks. Their applications, designs, and implementations can vary, including the debate over whether CBDCs should be "programmable." CBDCs can serve as "wholesale central bank digital currencies," restricted to banks and related financial institutions, or as "retail central bank digital currencies," catering to daily public consumption needs.
In 2017, Hong Kong's government initiated studies on launching a digital Hong Kong Dollar (e-HKD). By early 2022, the Monetary Authority had laid down technical and legal foundations, adapting existing laws and conducting cross-border payment experiments. In the prior October, the Monetary Authority successfully completed a six-week Bridge cross-border CBDC trial in collaboration with multiple institutions, conducting over 160 transactions totalling over HK$171 million.
The Hong Kong Monetary Authority introduced the "Cyber Hong Kong Dollar" pilot project in May. Selected firms from finance, payment, and technology sectors will undertake trials in areas such as comprehensive payment, programmable payment, offline payment, tokenized deposits, Web3 transaction settlement, and tokenized asset settlement. The decision to officially launch the digital Hong Kong Dollar is pending.
Preparing for a possible retail-level CBDC launch, the Monetary Authority follows a three-track approach. The ongoing pilot program is a significant part of this strategy. The Authority collaborates with stakeholders, conducts experiments, explores application scenarios, and addresses implementation and design concerns. Notable participants include Alipay Financial Services, HSBC, Visa, Mastercard, and more.
Seizing the opportunity
The pilot program is actively underway. Is the implementation of the digital Hong Kong Dollar beneficial for the region? Liao Yijian, HSBC Asia Pacific's co-CEO, expressed that it's undoubtedly beneficial for Hong Kong. He highlighted the Monetary Authority's research in both wholesale and retail CBDCs. Yijian noted the prominence of the digital renminbi (e-CNY) as a standard-setting CBDC, urging Hong Kong to capitalize on the opportunity for digital renminbi development.
Liang Yongxi, CEO of blockchain research, emphasized that the digital Hong Kong Dollar, as a retail CBDC, carries zero credit risk similar to physical currency. Transaction efficiency could be enhanced through instant clearing and settlement, reducing transaction time costs. Yongxi further underscored the potential for financial innovation if the digital Hong Kong Dollar were programmable, enabling third-party fintech firms and developers to create diverse applications and services, thereby advancing the financial system's modernization and development.
However, according to Liang Yongxi, the introduction of the digital Hong Kong dollar will present derivative risks and challenges that demand careful consideration. Foremost, he underscores the paramount importance of security. As the digital Hong Kong dollar operates as an encrypted currency on the foundation of blockchain technology, ensuring its security during transactions and storage is imperative. Any breach in security or system malfunction could lead to the theft or loss of digital assets.
Secondly, while the potential applications of the digital Hong Kong dollar are extensive, achieving actual widespread use will require dedicated time and effort for promotion. The level of acceptance among the Hong Kong populace, market demand, and collaboration from relevant industries all play pivotal roles in determining the success of the digital Hong Kong dollar. A survey conducted by HKUST in the prior October revealed that nearly 90% of respondents were familiar with digital currency or assets, yet nearly 80% hadn't utilized or held them. Only about 35% of respondents were aware of central bank digital currency (CBDC), indicating that raising public awareness about the digital Hong Kong dollar remains essential.
Furthermore, factors such as legal and regulatory frameworks, privacy safeguards, and whether the currency can be programmable will significantly influence its application. Defining the extent to which participants—like electronic payment operators, banks, and merchants—can access user information (including identity and transaction history) to comply with regulations involving anti-money laundering, anti-terrorist financing, and consumer protection necessitates thorough research and consideration.
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