SAR steps up its readiness for possible electronic Hong Kong dollar

Eddie Yue Wai-man, the CEO of the Hong Kong Monetary Authority (HKMA), hosted a ceremony on May 18 to mark the start of the electronic Hong Kong dollar (e-HKD) pilot program with 16 companies to test the digital currency for public use in shops, restaurants and money transfers.

In total, 16 banks and payment companies will select small groups of their clients to test six potential uses for the e-HKD online payments, payments in shops and restaurants, collecting government payouts, tokenized deposits, tokenized asset settlement, and Web3 trading and clearing, according to a statement by the HKMA.

The program is a key component of Rail 2 under the HKMA’s three-rail approach in paving the way for the possible implementation of a retail central bank digital currency (CBDC), i.e., e-HKD, in the future program.

Yue said: “While the HKMA has not yet made a decision on whether and when to introduce e-HKD, we are excited to kick-start the e-HKD Pilot Programme, which serves as a tremendous opportunity for the HKMA to collaborate with the industry in exploring innovative use cases and maximizing our readiness for a potential e-HKD. We appreciate the industry’s active participation in the pilots and look forward to the results. We are also pleased to have many experts in the academia joining forces with us on this CBDC journey. By fostering government-industry-academia collaboration in CBDC research, we aim to ensure the relevance of our research and development efforts, and enable the translation of such outcomes into viable business opportunities.”

The e-HKD is a CBDC. CBDCs have been referred to as “the future of payments”, or “the future of money”, and not without reason. Hong Kong, once again, is 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 individuals, 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 crimes, improve payment efficiency and reduce intermediary risks, etc.

The announcement of the e-HKD pilot program followed the technical white paper released by the HKMA on Oct 4, 2021, titled “e-HKD: A technical perspective”. As per the HKMA’s press release that day, apart from the continued and expanded collaborative effort with some central banks on cross-border application of wholesale CBDCs, the HKMA started a study on the prospect of issuing a 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 a retail CBDC that the HKMA is jointly investigating with the Hong Kong Centre of the BIS Innovation Hub, the white paper explored potential technical design options for issuing and distributing a retail CBDC.

The HKMA began researching CBDCs under Project LionRock in 2017, and has since then actively collaborated with some central banks in broadening their knowledge of wholesale CBDCs.

Building on the knowledge and experience of 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 white paper published on Oct 4, 2021, and to the announcement made on May 18 by Yue.

The e-HKD will just be an electronic version of a bank note, and the mechanism of issuing e-HKD 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 followed the Fintech 2025 strategy unveiled in June 2021 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 the article HKMA’s Fintech 2025 Strategy Is Big Step Forward (China Daily Hong Kong 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 Chinese 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 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.

To sum up, not only is Hong Kong in a perfect position to leverage digital yuan future deployment to enhance its status as one of the world’s most important financial centers, 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 is a fintech adviser, a researcher, and a former business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily.