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Second iteration of cross-border CBDC pilot between China, Hong Kong falters

Hong Kong’s attempt at exploring an international central bank digital currency (CBDC) payment functionality with China has begun tearing at the seams following consumer complaints.

The plan involves using China’s digital yuan to settle cross-border transactions between both regions, a scheme in the works since 2020. Local publication Sing Tao Daily stated that the project completed its second pilot in June with several nagging issues.

Led by the Bank of China (Hong Kong) Limited, the second testing phase involved experimentation in small high-frequency transactions in retail and restaurants using the digital yuan. Beginning with an initial pool of 500 retail participants, Bank of China expanded the group to 2,100, focusing on UBuy stores and online retailer JD.com.

The second iteration also drew collaboration from leading commercial banks in Hong Kong, including Standard Chartered (NASDAQ: SCBFF), HSBC (NASDAQ: HSBC), and Hang Seng Bank (NASDAQ: HSNGF).

While the project recorded a range of positives, certain flaws showed up against the future of the study. Consumers complained about the limited number of merchants accepting the digital yuan and the lack of technical expertise to operate the system.

“It took the cashier about one and a half minutes to find a terminal under the counter that could collect digital RMB,” said one user. “It seems they are not very familiar with it, and when customers ask how to use the red envelopes, the cashier is not very clear.”

The target market for the cross-border feature appears to be tailored to tourists visiting the Mainland from Hong Kong. According to the parties in the know, the project will be expanded to cover a wide range of use cases outside of retail, transport, and restaurants.

Both regions have been involved in several cross-border CBDC studies, including a collaboration with the Bank for International Settlements (BIS) mCBDC project in 2022. Previous reports suggested China is keen on exploring cross-border CBDCs with Russia, while Hong Kong’s officials have opened talks with the United Arab Emirates.

Concerns for the digital yuan

Despite surging to sky-high adoption numbers in early 2022, the digital yuan’s growth has stalled after its initial hype. In response, the People’s Bank of China (PBoC) extended the pilot program to more cities while integrating many functionalities into the digital wallet.

Local authorities have been urged to implement policies to drive adoption, with some cities opting to pay salaries and collect taxes in digital yuan. A previous launch of the digital yuan in Hong Kong recorded subpar adoption after only 625 residents signed up after the first four days.

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.

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