- The Hong Kong central bank has completed phase 1 of its CBDC pilot.
- The study uncovered three areas in which an e-HKD could benefit the economy.
- CBDCs remain a publicly unpopular policy decision.
The rapidly evolving financial landscape has thrust central bank digital currencies (CBDCs) into the global limelight, with 111 countries actively pursuing the concept, according to the Atlantic Council. These types of digital currencies have the potential to revolutionize the way we perceive and utilize money, ushering in a new era of financial innovation.
Although public concerns around CBDCs continue to grow louder, the global exploration of CBDCs appears to be picking up. The Hong Kong Monetary Authority (HKMA) recently completed phase 1 of its e-HKD CBDC pilot program, reporting that the exercise had provided valuable insights into potential e-HKD use cases.
Hong Kong’s CBDC Program
The retail CBDC pilot program is a joint initiative between the central bank and the local financial industry to assess the “commercial viability of potential use cases for an e-HKD” that launched in November 2022.
It focused on domestic and retail use cases, intending to explore other avenues, such as corporate and business-focused situations, in future phases. The HKMA selected 16 firms from the financial, payment, and technology sectors to participate in Phase 1. The firms were given free rein to design a hypothetical e-HKD according to their respective needs and scenarios.
“Their use cases spanned six categories, namely: full-fledged payments, programmable
payments, offline payments, tokenised deposits, settlement of Web3 transactions, and settlement of tokenised assets,” stated the HKMA report.
The pilot uncovered programmability, tokenization, and atomic settlement as potential areas where an e-HKD may add unique value.
- Programmability facilitated the wider adoption of conditional payments, leveling the playing field for businesses through low-cost loyalty programs and enabling flexible fund tracking.
- Tokenization may be a foundational element for Web3 transactions, catalyzing innovation by representing real-world assets as tokens.
- Atomic settlement emerged to address “last-mile” payment processing delays. This refers to the final stage of the payment cycle in which businesses sometimes experience slowdowns in being credited with funds, negatively impacting their cash flows.
Although phase 1 provided the HKMA with insights into the potential use cases for an e-HKD, technical considerations around distributed ledger technology (DLT) interoperability and scalability need further study, with the central bank open to utilizing a non-DLT infrastructure.
However, the report stated that further exploration is required to understand better the role of an e-HKD within the city state’s broader financial system.
Phase 2 of the e-HKD program
To better understand the e-HKD’s position within Hong Kong’s financial system, the HKMA proposed a further phase of study. This would build on phase 1’s findings to delve deeper into the practical aspects of programmability, tokenization, and atomic swaps.
Additionally, the HKMA stated that the next phase would explore new use cases and continue to pursue industry, academic, and other stakeholder engagement, particularly concerning laying the legal and technical foundations of the e-HKD. However, the HKMA stated it had not decided whether to roll out an e-HKD.
On the Flipside
- Critics warn of the potential for CBDCs to infringe on privacy and enable government overreach.
- The HKMA report mentioned a “unified ledger” for international transactions, confirming worldwide plans to implement a CBDC global grid.
- A retail CBDC system may cause significant structural upheaval of the retail banking system.
Why This Matters
The HKMA is moving forward with phase 2 of its e-HKD CBDC program, indicating a perceived value in exploring this new form of digital money. While the central bank has not yet decided whether to implement a CBDC, concerns are growing that worldwide authorities will eventually implement a global CBDC grid without proper public consensus.
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