OPINION – Towards an electronic Hong Kong Dollar (e-HKD), towards an e-Pataca as well?

A Central Bank Digital Currency (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. Undoubtedly, the pandemic has turbocharged a global financial technology revolution.

Central bank digital currencies 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, through its digital yuan tests, its participation in the mCBDC Bridge Project (formerly known as LionRock Project), and, now, through the study of a possible electronic Hong Kong Dollar (e-HKD).

CBDCs can serve many different purposes and can be designed accordingly: 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.

The Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not cryptocurrencies, even though there is of course some relation between both categories.

The rationale behind CBDCs and cryptos is actually the opposite: whilst CBDCs are Central Bank Money adopting a digital form (therefore, legal tender issued by a central bank, representing a claim against that central bank) and thus centralized, cryptocurrencies are a key pillar of the movement known as DeFi (Decentralized Finance).

As I mentioned in some of my previous articles, both Hong Kong and Macau are poised to play a key role when it comes to Digital Yuan´s tests and future roll-out.

Furthermore, HK is also studying now the feasibility of issuing its very own electronic Hong Kong Dollar (e-HKD).

On October 4, the Hong Kong Monetary Authority (HKMA) released a technical whitepaper on retail central bank digital currency (CBDC), titled “e-HKD: A technical perspective”.

As per the press release issued by the HKMA that day, a 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 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.

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.

What about Macau, though?

In April, Macau moved a step closer to the potential introduction of a digital currency, thus seeking to better combat money laundering and tax evasion.

The Macau Government announced that it plans to amend laws to regulate the issuance of a virtual legal tender. According to Chief Executive Ho Iat Seng, the government will work with China’s central bank to “study the feasibility of issuing a digital currency”.

Although no formal plans have been announced on whether or how a digital currency would be implemented, some industry players worry that the mandatory use of a digital currency as the only option for buying gambling chips would be negative for Macau casinos by essentially eliminating the junket system.

Nevertheless, it seems that, in that case, the currency issued would be the digital yuan too, not an e-Pataca, which means that, if Macau finally introduces the digital yuan for its domestic operations, an e-Pataca would make little sense.

In other words, Macau´s plans are to use China´s Digital Yuan, not their own CBDC.

As I told Reuters last April 22, “The digital yuan is important for casinos to control the money flows but it’s part of a bigger strategy which involves Macau becoming diversified,” (Macau’s digital yuan plans deal fresh blow to casino junkets, April 22, 2021).

Diversification is, therefore, the key: Macau’s future focus will be on finance. I already mentioned Macau trying to diversify its economy by creating a new stock exchange (a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub).

I also explained that Macau should leverage its position as a trade and commercial services platform between China and the Portuguese-speaking countries, as well as its involvement in the Guangdong-Hong Kong-Macau Greater Bay Area and the ‘Belt and Road’ initiative.

Last but not least, I made reference to another interesting initiative, the development of ‘enclave economies´, such as the cooperation demonstration zone located in Zhongshan, or the Traditional Chinese Medicine Science and Technology Industrial Park in Hengqin.

However, Macau´s shift towards finance will not be complete until the moment the region manages to create and maintain a strong Fintech and start-up ecosystem. 

In other words, with or without digital yuan, Macau needs to create and maintain a strong FinTech ecosystem, since the GBA becoming a reality will bring many opportunities to Macau now that the Special Administrative Region is refocusing towards finance, but in order for Macau to fully tap into all these opportunities, it should develop a much stronger FinTech ecosystem.

Hong Kong’s FinTech 2025 Strategy is a good example that Macau should follow.

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.