HKMA advancing with CBDC experiments but not ready to commit

Digital Hong Kong dollar is still up in the air

The Hong Kong Monetary Authority is entering a new phase of experimentation with the digital Hong Kong dollar, but is yet to determine if the state should provide digital money or leave it to the private sector.

Yvonne Tsui, senior fintech director, described the second round of the HKMA’s central bank digital currency experiments at OMFIF’s Global finance forum. This second phase of the process focuses on application research and pilots. Some 16 firms are participating in the pilot programmes, working on 14 projects on topics including programmable payments, tokenised deposits, settlement of tokenised assets and offline payments.

‘The use cases are opening our eyes to what the eHKD can do and what benefits it can bring to people and businesses in Hong Kong,’ said Tsui. ‘As well as the progress and results of the pilots, we’ll be factoring in international trends and market needs.’

Coordination and interoperability challenges

While the introduction of CBDCs promises a variety of efficiency savings and new functionalities, it is important to remember that it does not solve all the problems of payments – particularly cross-border payments – on its own. Larry Li, Swift’s head of North Asia, warns that new CBDCs will still need to be able to connect to existing real-time gross settlement systems, particularly if trading across borders.

‘International trade is a major driver of cross-border payments and it’s still 40% dollars,’ said Li. ‘So a project like mBridge will still need a system for connecting into dollar and euro payment networks to facilitate trade.’

He added that many of the challenges in cross-border payments are not fundamentally technological issues. ‘Yes, the technology can help, but it can’t address the legal challenges of connecting payments across multiple jurisdictions on its own. It can be an instrument, but solving these challenges requires a lot of political will across multiple jurisdictions.’

Weighing up DLT and centralised systems

Project mBridge is making use of DLT, giving it a distributed governance model well-suited to cross-border payments, while the People’s Bank of China’s domestic digital renminbi uses centralised architecture to ensure maximum speed. The panel weighed up the relative merits of the different architectures.

Raymond Qu, founder and chief executive officer of Geoswift, highlighted that, in transactions involving multiple parties, DLT offers substantial efficiency savings compared to centralised systems.

Bojan Obradovic, chief digital officer for Hong Kong at HSBC, observed that, among central banks and monetary authorities pursuing CBDC pilots, most but not all are experimenting with DLT because of the capacity to instantly transfer ownership and value. He added that investment is high in the private sector. ‘Most banks are already investing heavily in this technology and the ones that aren’t will do soon,’ he said, likening the situation to public cloud five or six years ago. ‘Cloud was like this. It’s a slow journey but everyone has started on that path now because they recognise the savings it offers.’

Alternative private systems

The panel also discussed the role of the private sector in money provision and payments. It was noted that private forms of money like tokenised deposits and stablecoins might be delivered more quickly than CBDCs. Tsui added: ‘The private sector is closer to the market and users, so they will naturally deliver digital currencies more quickly.’

While the state does not need to be the only provider of digital money, regulators have a very important role to play as gatekeepers, ensuring that private sector money provision is undertaken by responsible providers without jeopardising financial stability.

‘Stablecoins and tokenised deposits can all deliver programmability,’ said Obradovic. ‘But they differ in terms of liability and how you guarantee the stability of value. We’re experimenting with tokenised deposits to see if that’s a suitable form of digital money.’

Lewis McLellan is Editor of the Digital Monetary Institute, OMFIF.

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