Central bank digital currency (CBDC) activity is heating up around the world, with Hong Kong, Thailand, the European Union and now Australia announcing new projects while Cambodia launched a national digital currency.

The Hong Kong Monetary Authority and the Bank of Thailand are now engaged in CBDC pilot studies, with blockchain development company ConsenSys as their “technology partner.” 

Yesterday, Australia’s central bank announced that it, too, would launch a digital currency project,  in a reversal of its own earlier stance when it declared only weeks ago that there was “no strong public policy case” for an Australian CBDC. Australia’s new CBDC efforts will also be in partnership with ConsenSys. 

“A retail blockchain-based CBDC represents a new technology for the issuance of central bank money, where tokenized central bank money is accessible to the general public, and in this case businesses piloting the solution,” said Charles d’Haussy, director of ConsenSys Hong Kong, in a statement on the company’s work with the Bank of Thailand.

The pressure on central banks around the world to digitize their national currency has been intensifying as China — whose CBDC has been under development for six years and may finally be close to launch — has been testing its new digital yuan prototype ever more widely. After trialling the new DCEP digital currency among major banks, China recently showered digital yuan on 50,000 ordinary citizens to test out the DCEP in thousands of restaurants and stores. 

Last month, the central bank of the Bahamas was the first in the world to fully launch a CBDC, the sand dollar. The Bank of Korea is hot on the CBDC trail, also announcing that it would distribute its CBDC as part of a 22-month long pilot test. The Bank of Japan is also contemplating joining the CBDC race, stating that it “considers it important to prepare thoroughly,” for digital currencies despite currently having no plans to issue one.

In the U.S., the Federal Reserve also signalled  a new openness to collaborating with the private sector collaboration to create a digital dollar.

“While many may view this as a response to private sector initiatives like Facebook Libra, this is a technology worth exploring as the benefits of CBDCs extends to both wholesale and retail finance — providing the ability to lend greater traceability and reduce illicit activities,” said Amit Ghosh, Head of Asia Pacific at enterprise software firm R3, in an interview with Forkast.News.

Though the vast majority of CBDCs are in the study or development stage and not yet ready for market, digital currencies are already coming in different flavors to serve different national goals and priorities. Forkast.News will now analyze Hong Kong’s proposed CBDC in the context of China’s DCEP as an example of how different each digital currency can be.

China and Hong Kong’s financial ambitions in the Greater Bay Area

While China’s retail ambitions for its CBDC is clear — its central bank recently wrapped up a DCEP test that involved a digital yuan giveaway through e-red packets to the masses — Hong Kong’s central bank’s plans for its CBDC — at least for now — is only for wholesale institutional use. 

Also unlike mainland China, whose CBDC development has been under the tight control of its central bank, Hong Kong’s CBDC efforts — reflecting the capitalist nature of this global financial hub — is hand-in-hand with the private sector.

The technology powering Hong Kong’s CBDC will also likely be very different from China’s. Partnered with ConsenSys, Hong Kong, Thailand and Australia are all exploring CBDCs using distributed ledgers as the underlying technology. China’s DCEP digital yuan, on the other hand, is run on a government-run centralized network.

Hong Kong’s plans to create a CBDC with ConsenSys, observers say, could shine a light into how companies are working with central banks and whether the private sector is involved in only the technology or also assisting with digital currency policy.

The exact details of how China’s CBDC — also known as “Digital Currency Electronic Payment” (DCEP) — would interact and work with Hong Kong’s CBDC or other sovereign digital currencies in development are not yet known. But China and Hong Kong may already have advantages in working out differences and obstacles as Hong Kong is already part of an economic zone, known as the Greater Bay Area (GBA), with other southern parts of the mainland like Shenzhen.

See related article: China’s DCEP will be the world’s Sputnik money moment

“China is really crafting itself an advantage in this global race on CBDCs by investing in the technology, experimenting at a very fast pace, but they also have this advantage of a playground and some kind of sandbox, which is very unique,” d’Haussy said, in an interview with Forkast.News

The GBA “playground” that d’Haussy is referring to is a scheme by the Chinese government to link the cities of Hong Kong, Macau, Guangzhou, Shenzhen and more into a massive business and technology economic zone that could one day rival the U.S.’ Silicon Valley in California’s San Francisco Bay Area. 

Home to about 70 million people, the GBA accounts for 37% of China’s total exports and its GDP is US$1.5 trillion according to a 2018 report by HSBC.

“The respective central banks of the GBA have this opportunity to experiment with their CBDCs, in the coming months or years, within the same country, but with a different system of identity, a different system of payment, different system of different currencies,” d’Haussy said. “So it probably gives them a very interesting advantage to push experimentation further and faster than any other regions in the world.”

As reported on Forkast.News, one of the biggest commercial banks in China, Guangfa Bank, launched the first cross-border blockchain-based financial settlement system last year to serve the GBA financial network.

Hong Kong’s CBDC development with ConsenSys

In October, the Hong Kong Monetary Authority (HKMA) selected ConsenSys to lead the second phase of its CBDC project, which aims to facilitate cross-border payments in collaboration with the Bank of Thailand. HKMA started the Inthanon-Lion Rock Project in 2016, and will work with PricewaterhouseCoopers Ltd. and Forms HK to create the CBDC proof of concept. 

HKMA’s current CBDC project is a continuation of the Inthanon-LionRock cross-border payments project, which was built on R3’s enterprise blockchain platform, Corda.

“Consensys is a global leader in the sector and probably one of a handful of companies — globally — that could have pulled the project together as an outside contractor,” Andrew Work, a Hong Kong-based policy analyst and a co-founder of the Lion Rock Institute think tank, told Forkast.News.

ConsenSys is now involved with six central banks around the world to develop CBDCs. Aside from Hong Kong, Thailand and Australia, ConsenSys has also been engaged in government-backed digital payment efforts in France, Singapore and South Africa. Earlier this year, Consensys also produced a report for Indonesia, in collaboration with Blocksphere Indonesia, to review CBDC adoption for the country.

See related article: After China’s digital currency, Indonesia may blueprint its own in 2020

“It’s a big win for [ConsenSys] and right in their wheelhouse of working to provide enterprise-level blockchain solutions,” Work said. “If this thing is let loose in the wild, so to speak, it will need to have that level of quality built in.”

A key distinction between Hong Kong’s CBDC and China’s DCEP (Digital Currency/Electronic Payments) is that the proof of concept project for Hong Kong is focused on banks conducting interbank clearing. China’s DCEP, on the other hand, is designed to be a retail currency and as such, has greater technology requirements to implement a stable user interface and system via apps.

“That means that the China one will be all over public money transfers, like banks, WeChatPay, Alipay, ecommerce etc.,” Work said.

The Inthanon-LionRock project is developing a wholesale CBDC, solely for the use of Hong Kong and Thailand’s central banks.

Could Hong Kong — which after all, is a part of China — one day simply adopt China’s DCEP digital currency as its own instead of developing a Hong Kong CBDC for retail users?

The idea that Hong Kong could use China’s digital currency instead of developing its own retail CBDC would not be feasible, according to Zhiguo He, a professor of finance at the University of Chicago Booth School of Business. 

“You have to understand as a currency, you can easily switch to use Chinese yuan or Hong Kong dollars; but you cannot switch between yuan DCEP and HK-CBDC,” He told Forkast.News. “The CBDC itself not only includes the currency but also the infrastructure behind the whole system.”

“Hong Kong has an open capital account anyway,” He added. “It will be in the far future that China’s DCEP might be integrated with HK’s CBDC.”

Security, privacy and CBDCs

China’s DCEP could be used to add a greater layer of control and scrutiny over money outflows, but some are also concerned about the risk of decreased privacy should physical cash be replaced with the digital currency. 

Political turmoil in Hong Kong over the past year due to plans to allow extradition to mainland China may be spurring capital outflows from the region, according to some reports.

As the political climate between China, the U.S. and Hong Kong deteriorates and trade tensions escalate, could CBDCs play a future role in the countries’ power plays against each other and relative bargaining positions in international affairs? Some China watchers believe the DCEP digital yuan could one day erode the U.S. dollar’s hegemony in global trade and finance and shift the balance of powers in the world accordingly.

Privacy issues regarding CBDCs remain an important part of the discussion in many parts of the world where they are being developed. According to research by the European Central Bank (ECB), which is exploring anonymity in CBDCs, it is possible to create a payment system that allows users some degree of privacy for lower-value transactions, while still ensuring that larger transactions are scrutinized for anti-money laundering and counter-terrorism financing checks.  The ECB is currently surveying public opinions on a digital euro.

“China can develop its own DCEP without worrying too much of this issue,” He said. “As always, the way to address the privacy issue is ‘rule of law,’ which might be affected by political turmoil.”

Blockchain is also a core feature regarding the issue of privacy for financial transactions. The fact that ConsenSys is based on Ethereum could lead some to believe that the Inthanon-LionRock project would push the Hong Kong CBDC in the direction of permissionless blockchain. But experts say this likely won’t be the case.

“I strongly believe that the CBDC under the Inthanon-LionRock project, for its purpose of improving efficiency for trade-finance settlement among financial institutions in these two countries, should be permission-based and whole-sale,” He said.

A permissioned blockchain platform operated by banking institutions could maintain user privacy as opposed to financial transactions run on public permissionless blockchains. 

“Financial institutions such as HKMA have opted to use a permissioned blockchain platform, like Corda, as it enables enterprises to reap all the benefits of blockchain technology, while allowing transactions to remain private and only available to permissioned parties,” said R3’s Amit Ghosh.

While financial institutions are currently figuring out the potential benefits of CBDCs, it is possible that digital currencies could help anyone with an internet connection to better access financial services. 

“In a country like Thailand with a high unbanked population but also high smartphone and internet penetration rates, new online financial tools can operate on a retail CBDC payments system — enabling millions of consumers with access to a financial system that is resilient, convenient and secure,” Ghosh said. “As such, any kind of CBDC development — be it from HKMA or U.S. Federal Reserve, will help propel the transformation of the international financial system as we know it and enable financial inclusion around the world.”