Varun Resh
Fintech & Emerging Technologies
On 27th April, the Hong Kong Monetary Authority (HKMA) released a discussion paper titled “e-HKD: A Policy and Design Perspective”. As part of the “Fintech 2025” strategy HKMA has been working with the Bank of International Settlements (BIS) to research retail CBDCs (rCBDC), and with the academics and the wider industry on major policy challenges with regards to e-HKD.
In this most recent paper the Hong Kong regulator explores the potential benefits, challenges, design choices and use cases of an rCBDC while also considering its impact in the economy.
Benefits: The paper notes potential benefits of a rCBDC in improving the availability and usability of central bank money, including with underbanked communities and providing a clearing account directly with the central bank. It also notes improved resilience, increased innovation, effective implementation of monetary and exchange rate policies and response to new forms of digital assets as potential benefits.
Challenges: As a digital extension of cash, the paper notes rCBDC demand in the market is uncertain. Other risks noted include bank funding, with deposit outflows, high overall funding costs, squeezing interest margins and profitability, or high lending spread cost for customers which could expose firms to a higher risk of bank run. Cyber risks, including coding risks, oracle risks, cyber attacks, smart contract exploits and bugs and susceptibility to network outages were also discussed.
As part of the design considerations for rCBDC, three possible issuance mechanisms were explored:
- Coins approach: ‘agent banks could be appointed to handle all customer-facing activities related to the distribution of retail e-HKD’.
- Banknote approach: ‘similar to the existing banknote issuance arrangement through the note-issuing banks, e-HKD would be issued by the designated banks and hence would become the liabilities of the designated banks instead of the Government, but with full backing by the USD via CIs’ (Certificate of Indebtedness).
- Aggregate Balance (AB) approach: ‘e-HKD would be issued through converting designated banks’ clearing account balances with the HKMA into e-HKD’.
Use cases: While acknowledging the launch of Sand Dollar in Bahamas and e-CNY in Mainland China, HKMA notes it has received few suggestions on the potential use cases of e-HKD in the Hong Kong market. Private sector innovation at the retail wallet layer level, offline payments and as a compliance tool were few application areas mentioned in the paper.
Looking ahead HKMA concluded the paper raising areas for further discussion with the industry including: use cases, privacy, programmability, interoperability, technological barriers, private sector contribution and coin distribution.
