Hong Kong Launches Pilot Programme for e-HKD

Hong Kong is exploring the possibility of issuing a retail central bank digital currency (CBDC), known as e-HKD, that could potentially replace physical cash in the future. The Hong Kong Monetary Authority (HKMA) has announced the commencement of the e-HKD Pilot Programme, which will involve 16 firms from the financial, payment and technology sectors. The pilot programme will test various use cases and design issues related to e-HKD, and the results will be shared with the public at Hong Kong FinTech Week 2023.

e-HKD is a digital version of the Hong Kong dollar, which is the official currency of Hong Kong. Unlike cryptocurrencies or stablecoins, e-HKD is backed by the central bank and has the same legal tender status as physical cash. e-HKD aims to provide a fast, secure and convenient payment option for the public, as well as to enhance financial inclusion, innovation and efficiency.

e-HKD is also important for Hong Kong’s role as an international financial centre and a gateway to mainland China. By issuing e-HKD, Hong Kong could potentially enhance its cross-border payment and settlement capabilities, as well as its interoperability with other CBDCs, such as the digital yuan. e-HKD could also support Hong Kong’s participation in the global CBDC network, which is being developed by the Bank for International Settlements (BIS) and other central banks.

How does the e-HKD Pilot Programme work?

The e-HKD Pilot Programme is part of Rail 2 under the HKMA’s three-rail approach to the possible implementation of e-HKD. Rail 1 focuses on laying the legal and technical foundations of e-HKD, while Rail 3 will decide whether and when to introduce e-HKD to the public.

Under Rail 2, the HKMA will conduct a series of pilots in close collaboration with various stakeholders, including banks, payment service providers, technology firms, merchants and consumers. The pilots will take deep dives into potential use cases in six categories, including:

• Full-fledged payments: e-HKD can be used for online and offline transactions, such as e-commerce, bill payments, peer-to-peer transfers and point-of-sale purchases.
• Programmable payments: e-HKD can be embedded with smart contracts or other logic to enable automatic or conditional payments, such as escrow, loyalty rewards, donations and subscriptions.
• Offline payments: e-HKD can be used without internet connection or electricity, such as in remote areas, during emergencies or for small-value transactions.
• Tokenised deposits: e-HKD can be issued as tokens that represent deposits in banks or other financial institutions, which can facilitate instant redemption, transfer and settlement.
• Settlement of Web3 transactions: e-HKD can be used to pay for transactions on Web3 platforms, such as decentralized applications (DApps), non-fungible tokens (NFTs) and decentralized finance (DeFi).
• Settlement of tokenised assets: e-HKD can be used to settle transactions involving tokenised assets, such as securities, commodities, real estate and art.

The HKMA has selected 16 firms to participate in the first round of pilots for 2023. These firms include:

• Banks: Bank of China (Hong Kong), HSBC, Standard Chartered Bank and WeLab Bank
• Payment service providers: AlipayHK, Octopus, Tap & Go and WeChat Pay HK
• Technology firms: AntChain, Forms Syntron, IBM, Mastercard and R3
• Others: Hong Kong Cyberport Management Company, Hong Kong Science and Technology Parks Corporation and The Hong Kong Applied Science and Technology Research Institute Company

The HKMA will closely monitor the progress and outcomes of the pilots, and share the key learnings with the public at Hong Kong FinTech Week 2023, which will take place between October 30 and November 5. The HKMA expects to conduct more rounds of pilots with the industry in the future.

What are the challenges and opportunities for e-HKD?

The HKMA has not yet made a policy decision on whether and when to introduce e-HKD, as there are still many challenges and opportunities to be explored. Some of the key issues that the HKMA and the industry will need to address include:

• Privacy protection: e-HKD should respect the privacy of users and protect their personal data, while also complying with anti-money laundering and counter-terrorism financing (AML/CFT) regulations and facilitating law enforcement.
• Cybersecurity: e-HKD should be resilient to cyberattacks and ensure the security and integrity of transactions and data, while also providing contingency measures and recovery mechanisms in case of incidents.
• Interoperability: e-HKD should be compatible and interoperable with existing payment systems and platforms, as well as other CBDCs and digital currencies, to enable seamless and efficient cross-border and cross-platform payments and settlements.
• Performance and scalability: e-HKD should be able to handle high volumes and frequencies of transactions, as well as support various types and sizes of payments, without compromising speed, reliability and cost-effectiveness.
• Compliance: e-HKD should comply with the relevant laws and regulations in Hong Kong and other jurisdictions, as well as the international standards and best practices for CBDCs, such as those set by the BIS and the Financial Action Task Force (FATF).
• Operational robustness and resilience: e-HKD should be able to operate smoothly and reliably under normal and abnormal conditions, such as market fluctuations, network disruptions, power outages and natural disasters.
• Technology-enabled functional capabilities: e-HKD should leverage the latest technologies, such as blockchain, artificial intelligence and biometrics, to enable innovative and value-added features and functions, such as programmability, traceability and identity verification.

To facilitate collaboration between the government, industry and academia on CBDC research, the HKMA also plans to establish a CBDC Expert Group, which will comprise leading academics from local universities who will contribute valuable insights and support Hong Kong’s future exploration on e-HKD.