Hong Kong’s central bank, the Hong Kong Monetary Authority (HKMA), recently published the whitepaper for a proposed retail central bank digital currency. According to the white paper, the CBDC will be called the e-HKD.
Interest in CBDC
The interest in a CBDC has been going on for years now. HKMA first began working on the feasibility of a digital national currency in 2017, in collaboration with international partners. Since then, interest has been growing steadily. The white paper aims to explore the feasibility of launching such a country in the territory. It has been working on the feasibility of launching a CBDC for interbank settlements with its counterpart in Thailand.
Part of the Fintech 2025 Strategy
The launch of the white paper is one of the steps in the broader Fintech 2025 strategy. HKMA revealed the strategy in June 2021. The strategy foresees a future where all banks in the territory go fintech by 2025. It also calls for the future-proofing of Hog Kong’s financial system for future CBDCs. Additionally, it calls for creating the next-generation data infrastructure, expanding the fintech-savvy workforce, and nurturing the fintech ecosystem with proper policies, and funding.
Future-proofing Hong Kong for CBDCs will entail working with the Bank for International Settlements (BIS) Innovation Hub Hong Kong Center. This collaboration will focus on researching retail CBCs to understand the use cases, benefits, and risks. The strategy also revealed that HKMA would continue working with China’s Central Bank to support the technical testing of the digital Yuan in Hong Kong. Doing so will ensure the creation of convenient means for cross-border payments for mainland and domestic residents.
Proposed Architecture
According to the whitepaper, the proposed architecture is the first amongst other papers by central banks that has a groundbreaking privacy preservation arrangement built into it. This architecture will allow traceability of transactions in a manner that is amicable to the privacy needs of users. In the whitepaper, several issues are identified for further research.
The paper states that there will be a two-tier distribution model. There will be a wholesale system for the central bank to issue and redeem the CBDC and a retail layer for commercial banks. Through the retail system, commercial banks can issue CBDC-backed e-money. HKNA was guided by several principles in creating the architecture, these are efficiency, safety, openness to change, competition, and innovation.
Other Central Banks Are Working on a CBDC
Besides the HKMA, other banks globally have been researching CBDCs. One of the biggest central banks working on such a project is the Chinese central bank, which has already conducted numerous trials. However, they have not yet announced a launch date for their CBDC. The Bank of England had also expressed some interest in a CBDC about two years ago. South Korea has also been conducting a CBDC trial since December 2019. Finally, another noteworthy example is Sweden, which launched a trial for a CBDC in early 2020.
What the Leadership Team Had to Say
According to Eddie Yue, the Chief Executive of the central bank
“the Whitepaper marks the first step of our technical exploration for the e-HKD.” He added that “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.”
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