In April, the Hong Kong Monetary Authority (HKMA) issued a discussion paper titled “e-HKD: A policy and design perspective” (the “Paper”), inviting views from the public and the industry on key policy and design issues for introducing retail central bank digital currency (rCBDC), i.e. e-HKD, in Hong Kong.
After announcing the “Fintech 2025” strategy in June 2021, the HKMA started a project to study the prospect of introducing the e-HKD in Hong Kong. The initial findings of the first part of the study, which focused on the technical aspect, were published in October 2021 in the form of a technical whitepaper for comments.
The second part of the study focused on the policy and design aspects of introducing the e-HKD, and the initial findings of which are set out in the Paper. The issues examined in the study include the potential benefits and challenges, design considerations such as issuance mechanism, interoperability with other payment systems, privacy and data protection and legal considerations, as well as use cases. To facilitate stakeholders in sharing their views, the HKMA has highlighted the issues for comment in the form of twelve discussion questions in the Paper.
Eddie Yue, chief executive of the HKMA, said, “This Paper marks another milestone in our exploration for the e-HKD. The policy and design considerations set out in the paper have reflected latest international developments as well as the unique features of the financial market of Hong Kong. We strongly encourage the public and the industry to take part in this important consultation and share their views with us. The comments received would help us formulate the strategy for best positioning our financial market in the rapidly evolving rCBDC space.”
Some of the pros of e-HKD mentioned in the Paper include how its functionalities and attributes could position Hong Kong for the challenges of alternative units of account (i.e.stablecoins) dominating the city, even though such a possibility remains remote. The potential programmability aspect of e-HKD could also enable innovative applications like smart contracts, provided that the associated challenges (e.g. programme glitches) are properly addressed.
Cons arose in the Paper too: While e-HKD could provide an alternative payment method, a widespread prevalence of e-HKD at the expense of physical cash may actually render the payment system more vulnerable to cyberattacks and power/network outages, as well as create a perception of intensifying competition in the retail payment landscape, even though it is not the objective of introducing e-HKD. The rise of cryptocurrencies has been met with an equal rise in fraudsters – the impact that cybercrime could have can not be understated.
The Paper also mentions how there is a concern that potential holders’ switching from deposit to e-HKD could lead to bank disintermediation especially during a financial crisis period, adversely affecting banks’ funding and their capacity to supply credit, the run risk for banks in Hong Kong would be very low in any case, given depositors’ confidence in the Deposit Protection Scheme and the HKMA’s prudential regulations and oversight. Appropriate design choices (i.e. unremunerated vs. remunerated) and adequate safeguards (e.g. maximum account balance) could help address the risk, though further in-depth considerations would be required as an overly restrictive scheme could discourage potential users of e-HKD.