The Hong Kong Monetary Authority (HKMA) first mentioned its plan to explore a digital currency (electronic Hong Kong Dollar or e-HKD) as part of its Fintech 2025 strategy unveiled in June.
Following this, on October 4, the HKMA released a technical whitepaper on its retail central bank digital currency (CBDC), titled “e-HKD: A technical perspective”. As per the press release issued by the HKMA that day, part from the continued and expanded collaborative effort with peer central banks on the cross-border application of wholesale CBDC, the HKMA has started a study on the prospect of issuing retail CBDC in Hong Kong, the e-HKD, covering both technical and policy considerations, and aims to come up with an initial view by the middle of next year.
Building on the model for retail CBDC that the HKMA is jointly investigating with the Hong Kong Centre of the BIS Innovation Hub, the Whitepaper explores potential technical design options for issuing and distributing retail CBDC.
The e-HKD will allow the public to use this form of electronic payment to shop, dine or make money transfers.
Central bank digital currencies (CBDCs) have been referred to as “the future of payments”, or even “the future of money”, and not without reason. Hong Kong, once again, has been at the forefront of this.
A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies. There are many possible motivations behind CBDCs: they can replace physical notes; they can be used to improve financial stability as a monetary policy tool, to promote financial inclusion, to fight against financial crime, improve payment efficiency and reduce intermediary risks, etc.
In this sense, Mr Eddie Yue, Chief Executive of the HKMA, said, “The Whitepaper marks the first step of our technical exploration for the e-HKD. The knowledge gained from this research, together with the experience we acquired from other CBDC projects, would help inform further consideration and deliberation on the technical design of the e-HKD. We also look forward to receiving feedback and suggestions from the academia and industry to enrich our perspectives.”
The HKMA began researching CBDCs under Project LionRock in 2017, and has since then actively collaborated with other central banks in broadening their knowledge of wholesale CBDCs.
Building on the knowledge and experience in wholesale CBDCs, in June 2021, the HKMA commenced Project e-HKD, which is a retail or general-purpose CBDC project that aims to study the feasibility of the e-HKD, which led to the whitepaper published last October 4 mentioned above.
The e-HKD will just be an electronic version of a bank note, and the mechanism of issuing the digital currency will be the same as that for physical bank notes under the currency peg system, without affecting the monetary base. The existing Hong Kong dollar peg with the US dollar will remain in place.
As I said, this announcement follows the Fintech 2025 strategy unveiled in June this year by the HKMA, whose second strategic pillar was for the HKMA to strengthen its research work to increase Hong Kong’s readiness in issuing CBDCs at both wholesale and retail levels.
As I mentioned in “HKMA´s Fintech 2025 strategy is big step forward” (China Daily HK Edition, July 16, 2021), Fintech 2025 aims to encourage the financial sector to adopt technology comprehensively by 2025, and also, as per Yue’s words, to “promote the provision of fair and efficient financial services” for the benefit of Hong Kong residents and the economy.
I also mentioned that Fintech 2025 seems consistent with Hong Kong’s current role as a global fintech and trading hub. Indeed, Hong Kong’s future is not so much about remaining as the gateway to the mainland but mostly about keeping and enhancing its current status as one of the world’s most important financial centers by adopting the very economic initiatives that are relevant to the development blueprint for the Guangdong-Hong Kong-Macao Greater Bay Area.
In that sense, Fintech 2025 is aligned with the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, which recognized Hong Kong’s economic potential at the national level.
Hong Kong will not walk alone in this area, since the fintech scene on the Chinese mainland is developing very fast too. In this sense, Hong Kong (and Macao, to a lesser but very relevant extent) can undoubtedly play a vital role in China’s fintech scene, given Hong Kong’s current position as one of the most important financial centers in the world and given that its fintech industry has the potential to develop much faster now that it can leverage its involvement in the Greater Bay Area blueprint.
To sum up, not only Hong Kong is in a perfect position to leverage the digital yuan tests and future deployment to enhance its status as one of the world’s most important financial centers, but it is also in a perfect position to explore the possibility of an e-HKD as well, showing once again that the HKMA and therefore Hong Kong are at the forefront of the CBDC race. Hong Kong has been for decades one of the world’s most important financial centers and will remain so, but it is wise to keep improving and embracing technologies in order to keep its leading position and never be left behind.
The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.