HKMA says Hong Kong digital currency pilot points to ‘tremendous impact’ on banking, financial services

E-HKD ‘will have a tremendous impact on the banking and financial’ services sector, HKMA deputy CEO Howard Lee says
Pilot provided an ‘initial picture’ of the benefits of a central bank digital currency ecosystem: HSBC Hong Kong CEO

Hong Kong Monetary Authority (HKMA)

Mia Castagnone

Published: 7:45pm, 30 Oct 2023

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The e-HKD, Hong Kong’s central bank digital currency (CBDC), could help to settle payments quicker and be more cost effective for businesses, a pilot trial has shown.

As part of this pilot, which began in May, 16 banks and payment companies tested six potential uses of the e-HKD with a small group of clients. These uses included online payments, payments in shops and restaurants, the collection of government payouts, tokenised deposits, tokenised asset settlement and Web3 trading and clearing.

The three areas where the CBDC could add value to Hong Kong’s current payments ecosystem are programmability, tokenisation and instant payment settlements.

The roll-out of the e-HKD “will have a tremendous impact on the banking and financial” services sector, but the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, is “not yet at the point where a decision can be made to introduce the e-HKD”, Howard Lee, the HKMA’s deputy CEO, said on Monday.

A phase-2 trial will delve deeper into the e-HKD technology, its business model and legislation, Lee added. The HKMA is already looking for banks to partner with for the next trial, which is anticipated to get under way early next year.

To execute the pilot trial, the HKMA issued a limited amount of the digital currency in a “sandbox”, or a controlled experimental environment, for companies taking part to test its infrastructure, security and other operational issues.

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HSBC, Hong Kong’s largest bank, took part in two pilot projects, testing e-HKD payments on the Hong Kong University of Science and Technology campus and simulating tokenised deposit transactions in collaboration with Visa.

“The insights gained from this closed-loop pilot provide an initial picture of the benefits that a CBDC ecosystem could potentially provide in everyday payments,” said Luanne Lim, CEO of HSBC Hong Kong.

Lim said programmability was a feature rated highly by merchants and consumers alike, while automated rewards resulted in an 85 per cent increase in customer transaction volumes on one of the promotion days.

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“We look forward to working closely with the HKMA on developing subsequent phases to explore more advanced programmability, use cases, and [to] involve a greater number of participants,” she added.

The pilot shows programmability at scale will need an ecosystem with the necessary infrastructure to ensure businesses have the right incentives and resources to adopt the e-HKD.

The digital currency could give Hong Kong residents more choices when it comes to payments, and it could be applied to areas such as public transport, university campuses and wet markets. For instance, trial participants showed great interest in the potential use of the e-HKD at retailers that only accept cash because of the add-on costs of Hong Kong’s current digital payment systems.

The e-HKD could also facilitate instant payment processing. This has the potential to accelerate the fund settle time between consumers and retailers, and help businesses access funds sooner, the pilot shows.

The digital currency could be used or issued on a blockchain and be used to settle transactions in Web3, which could reduce the risk of losses from fluctuations and volatility associated with cryptocurrencies, Lee said. The digital currency could also accelerate the development of a token-based system in Hong Kong.

Web3 infrastructure and application provider Arta-Emali HK, another trial participant, tested programmable payments. It found the e-HKD reduced costs and preserved privacy during investor onboarding.

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Investors were able to execute fund order instructions in a specific investment period and target returns through the smart contract of a hypothetical e-HKD, Arta-Emali said. The smart contract automatically executed near-instant delivery, and fund managers could efficiently issue fund tokens, the company added.

At the international level, the HKMA has been working on the mBridge project with the People’s Bank of China, the central banks of Thailand and the United Arab Emirates, and the Bank for International Settlements Innovation Hub Hong Kong Centre to study the e-HKD’s use in settling international payments.

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