The Hong Kong Monetary Authority (HKMA) has released a report elucidating its initial findings after the completion of phase 1 of its pilot program, Project e-HKD. The project was initiated to examine the potential benefits and drawbacks of introducing a Central Bank Digital Currency (CBDC) in the form of a digital Hong Kong Dollar, commonly referred to as e-HKD. The report underscores three main areas where an e-HKD could add value to the payment ecosystem: programmability, tokenization, and atomic settlement.
According to the HKMA, programmability opens avenues for enhanced customer protection. Smart contracts are an illustration of this capability. Businesses and consumers may gain an additional layer of trust through these automated, self-executing contracts. Moreover, the authority mentioned the utilization of a “retail escrow product,” tested by the China Construction Bank Asia and Hong Kong’s Bank of China. This mechanism allows consumers to make a prepayment for goods or services, to be automatically distributed upon the service’s completion.
Atomic settlements and tokenization: Solving ‘last mile’ payment issues
Tokenization could potentially disrupt conventional marketplaces by offering asset owners increased liquidity, efficiency, and transparency. Additionally, atomic settlements could revolutionize the last mile of payment processing by making transactions immediate and final. In the pilot phase, the HKMA tested the usage of Distributed Ledger Technology (DLT), though it remains open to non-DLT based designs as well.
However, the authority stressed that these initial findings were conducted under controlled conditions, involving 14 pilots with 16 firms. The HKMA remains cautious, pointing out that the potential for realizing these unique values at a larger scale warrants further investigation and market development. The small-scale pilots helped identify minor frictions, which the authority warns could become more significant, or even unacceptable, in a live environment.
Amidst a worldwide debate on CBDCs, Hong Kong’s position seems cautiously optimistic but non-committal. While countries like India have moved forward with plans for a retail CBDC, and Australia considers it a future prospect, the U.S. remains divided on the issue. Hong Kong’s efforts to become a virtual-asset hub took a major step forward with the first set of licenses granted for crypto trading platforms this past August.
Hence, the next steps for Hong Kong involve delving deeper into selected pilot programs to further understand the potential roles and impacts of an e-HKD. Significantly, the HKMA stated that the bank’s stance on a retail CBDC is still up for debate, forming part of a larger multinational conversation.
