HKMA: Hong Kong inches toward launching wholesale CBDC

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The Hong Kong Monetary Authority (HKMA) has confirmed that the development of a central bank digital currency (CBDC) is at the top of its agenda. The central bank disclosed its position in a paper titled “e-HKD: Charting the Next Steps,” where it considered the technical and policy challenges associated with a CBDC launch.

Per the report, the HKMA carried out two rounds of market consultations with key stakeholders, bordering on technicalities and the regulatory hurdles they could face. The report noted that an overwhelming majority of the 75 participants expressed enthusiasm for the viability of a digital version of the Hong Kong Dollar.

However, some concerns were raised for the banking regulator, including privacy protection and identifying new use cases for the CBDC. The problems were addressed in the paper, with the HKMA pledging to put them under consideration going forward.

“We welcome the positive feedback received and agree with the respondents about the need to take a deep dive into issues such as privacy protection and use cases,” Eddie Yue, Chief Executive of the HKMA, said.

“As Hong Kong’s central banking institution, we will ensure that Hong Kong continues to play a leading role in the global financial landscape by getting ourselves ready as best as we can in terms of CBDC and by providing the right soil for growing innovative ideas,” he added.

To achieve its aim, the central bank says it will adopt a three-rail approach to address all the concerns raised in the market consultation. The first rail will cover the legal and technology foundation, precisely the challenges relating to creating both a wholesale and retail layer of the CBDC.

Issues like application and design will be handled in the second rail and will involve a series of test pilots, while rail three will concern itself with the launch. The HKMA has not yet issued a time frame, but experts believe that a full launch could take up to two years, considering the amendments the legislature will have to carry out in order to give the CBDC legal backing.

CBDCs are plagued with challenges

Central banks worldwide are turning towards CBDCs to stifle the growth of digital assets in their jurisdictions, often citing the flight of capital as a major reason for their interest in them. Yet, the challenges of privacy concerns, the high risk of cyber attack, regulatory constraints, and bank disintermediation, amongst others, have troubled the sector.

After Nigeria launched its CBDC in October 2021, the e-Naira failed to gain momentum as barely one million users created an account on the mobile app. Other countries have recorded varying degrees of success in their CBDC development, with the digital yuan being widely anticipated.

Despite over $10 billion in transaction volumes, the People’s Bank of China has to contend with claims that its CBDC is a “spy tool” in the hands of the Chinese Communist Party.

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: The BSV Global Blockchain Convention presentation, CBDCs and BSV