Bank of China Hong Kong explores smart contracts for CBDC payments in new pilot

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The Bank of China Hong Kong (BOCHK) has announced the start of a pilot project to explore the use of smart contracts in the proposed Hong Kong central bank digital currency (CBDC).

The bank will examine smart contract usage in prepaid service contracts through its mobile application, BOC Pay. Initial participants for the study will be selected bank employees and ten merchants drawn from the medical, beauty, education, and fitness sectors, according to its official disclosure.

Per the statement, customers’ prepaid funds will be automatically converted to e-HKD in their accounts designed to be run by smart contracts. The smart contract executes after meeting certain predetermined conditions, allowing participants to pay for goods and services with select merchants.

“This hypothetical e-HKD pilot is being conducted through BOCHK’s existing BoC Pay and BoC Bill Merchant App, effectively reducing the technical barriers and additional resources required for merchants to participate in this pilot of prepaid consumption,” said Chen Guang, deputy general manager of the Digital Currency Task Force at BOCHK.

In addition to integrating smart contracts with the e-HKD, the pilot links point-of-sale functionality in the offering. Through the integration, merchants are not required to install additional software, which analysts say could improve the adoption levels of the CBDC.

BOCHK has been experimenting with prepaid functionalities since May, when the Hong Kong Monetary Authority (HKMA) officially unveiled the start of CBDC pilots. Sixteen banks were onboarded to explore the use cases of full-fledged payments, offline payments, tokenized deposits, and programmable payments with retail applications.

“We aim to capitalize on HKMA’s e-HKD Pilot Programme to create a new business model for retail SMEs and build a healthy ecosystem for prepaid consumption,” said Guang.

The BOCHK’s pilot follows a recent study by HSBC Hong Kong into programmable payments involving staff and students of the HKUST Business School. Under the pilot, 200 individuals will receive hypothetical eHKD to be spent on campus within five weeks.

Back in July, BOCHK announced an initiative to introduce cross-border functionalities, allowing Chinese tourists visiting Hong Kong to use the digital yuan to pay for goods and services.

Not yet ready for mainstream CBDC launch

The HKMA has submitted that it will not be proceeding with a mainstream launch of its e-HKD until key industry players have obtained the necessary experience. HKMA CEO Eddie Yue stated that financial entities must achieve technological and regulatory clearance to prepare for a commercial CBDC rollout.

Despite the haziness over the future of the CBDC, the HKMA’s pilot continues to inch forward, with cross-border payment functionalities standing out as an obvious use case. For now, the HKMA says it may be impossible for the CBDC to compete with existing retail payment options unless it becomes cheaper, faster, and more secure.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Finding ways to use CBDC outside of digital currencies