In a major development for the rollout of central bank digital currencies (CBDCs) worldwide, the Hong Kong Monetary Authority (HKMA) announced the launch of an e-HKD pilot program Thursday, detailing the digital currency’s multiple potential use cases in payments and tokenized deposits.
A number of major names from the financial, payment and tech industries will participate in the e-HKD (electronic Hong Kong dollar) pilot project as operational partners. These include state-owned Bank of China, China Construction Bank, Industrial and Commercial Bank of China, HSBC and Standard Chartered Bank.
“While the HKMA has not yet made a decision on whether and when to introduce e-HKD, we are excited to kick-start the e-HKD Pilot Program,” Eddie Yue, chief executive of the HKMA, said in a Thursday statement following the launch.
Yue added that the collaborations with major industry players through the pilot could be helpful in “maximizing our readiness for a potential e-HKD.”
Ant Group’s Alipay, one of China’s major payment apps, will also test the e-HKD’s programmable payment use cases through its Hong Kong unit. Other participants include Ripple Labs, Visa and Mastercard.
The pilot program will explore e-HKD use cases in six categories: full-fledged payments, programmable payments, offline payments, tokenized deposits, settlement of Web3 transactions and settlement of tokenized assets.
The pilot comes after the HKMA, Hong Kong’s de facto central bank, released a whitepaper in October to explore the feasibility of a retail CBDC.
Over in the neighboring Chinese mainland, the People’s Bank of China has been actively testing the so-called e-CNY, which is widely considered the world’s most advanced CBDC. In January 2022, the Chinese central bank launched a pilot version of the e-CNY app for retail use in trial regions.
The HKMA also pledged that it will form a “CBDC Expert Group” comprising scholars and industry experts to examine policy and technical issues such as privacy protection, cybersecurity and interoperability.
Piloting a CBDC would put Hong Kong in a “first to market” position with many advantages, Stanley Chao, managing director of U.S.-based business strategy firm All In Consulting, told Forkast via email.
Chao said the transition process of adopting a CBDC would create hurdles for consumers, retailers and banks, “so being able to solve these problems first will create big advantages and push them light years ahead of countries still in the vetting process.”
Possible e-CNY linkage?
In a September consultation paper, the HKMA said it will study a potential linkage and interoperability between the e-CNY and e-HKD. That linkage could be a “game changer,” Chao said.
“Such a seamless process without any banks or commissions involved will, I believe, create millions more cross-border transactions to the point that it could boost Hong Kong’s economy,” Chao said. He added that this would put pressure on other central banks in the region, such as those of Singapore, Thailand and Malaysia, to work with Beijing to link currencies as there may be fear of missing out.
Charles d’Haussy, chief executive of dYdX Foundation, said the e-HKD will likely struggle to get traction with Hong Kong locals but “shall be a no-brainer for the mainland visitors who could enjoy automatic [conversions] in their digital wallets from e-CNY to e-HKD.”
The Covid-19 pandemic had previously put the brakes on experiments with the e-HKD in the Greater Bay Area — which connects Hong Kong, Macau and Guangdong province — said d’Haussy, who has worked with HKMA and several other central banks on CBDC projects in his previous roles at ConsenSys, an Ethereum software developer.
“With Covid behind us, experiments can restart at full steam and are amplified by recent supportive digital assets regulations updates in Hong Kong,” d’Haussy added.
Richard Turrin, a Shanghai-based fintech consultant, explained how the e-HKD could become a crucial gateway to the mainland economy.
“In the long term, the e-HKD may serve as a bridge to the e-CNY just as the Hong Kong dollar does now,” said Turrin. “Hong Kong is a model for both crypto regulation and CBDC issuance, and is taking the lead in this critical new sector.”
Global implications
A CBDC tracker published by U.S.-based think tank the Atlantic Council showed that 18 of the Group of 20 countries are in the advanced stage of CBDC development. Of those, seven countries are already conducting their own pilot programs.
“The speed that HKMA is moving is not only startling but puts other central banks, particularly the U.S., on notice,” said All In Consulting’s Chao.
U.S. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have expressed the U.S. government’s interest in developing a digital dollar. In March 2022, U.S. President Joe Biden signed an executive order that placed urgency on research and development of a potential CBDC.
“The quickness of the HKMA as well as the great strides that Beijing has placed on introducing the RMB as a cross-border reserve currency has got to make Powell move faster on a digital dollar rollout,” Chao added.
Meanwhile, the HKMA has been working on a cross-border CBDC project dubbed mBridge in collaboration with the Bank for International Settlements and central banks of Thailand, China and the United Arab Emirates.
The HKMA said in October that the mBridge project had successfully executed real-value cross-border transactions involving four currencies and 20 commercial bank participants across four jurisdictions.