Hong Kong now exploring retail CBDC in upcoming Project Aurum

Hong Kong is exploring a general-purpose central bank digital currency (CBDC) to be distributed through commercial banks and payment service providers, said Howard Lee, deputy chief executive of the Hong Kong Monetary Authority, during the BIS Innovation Summit 2021 held this week.

The Hong Kong Monetary Authority will study the benefits and challenges of different architectures for the distribution of general-purpose CBDCs intended for individuals and firms in its upcoming Project Aurum, Lee said.

“Specifically we will look into two architectural models, namely the hybrid CBDC and private CBDC-backed stablecoins,” Lee said in his speech titled “Central Bank Innovations: Payments, Data and Capabilities,” at the virtual event hosted by the Bank for International Settlement.

A hybrid CBDC provides for direct claims on the central bank while allowing intermediaries such as banks to handle payments. A stablecoin is a cryptocurrency that is designed to minimize price volatility by pegging to a more stable asset such as fiat currency.

Hong Kong has yet to make a decision as to whether a general-purpose CBDC will be issued, Lee said.

“Designing a CBDC requires balancing manifold considerations, ranging from consumer needs to policy and technological considerations, against various potential risks. This could involve difficult trade-off in decision-making,” he added. “In parallel, we are working with the People’s Bank of China on a technical pilot testing of using e-CNY for cross-border retail payments in Hong Kong.”

Lee noted the emergence of cryptocurrencies and stablecoins as a new asset class “that are sometimes claimed to be also a medium of exchange despite their volatility and concerns about their security.”

“Widespread adoption of these digital currencies by the general public could also diminish the use of the sovereign currency, and even affect a central bank’s monetary operations,” Lee said.

The topic of CBDCs, both general-purpose CBDCs for use by the general public and wholesale CBDCs for use in financial markets has been high on the agenda of the central banks around the world.

“Apart from being a new and trusted digital means of payment, CBDCs could potentially also foster competition and innovation in the payment sector,” Lee said. “At the wholesale level, we see great opportunities for CBDCs to enhance the efficiency of cross-border payments.”

Last month, the central banks of China, the United Arab Emirates, Hong Kong and Thailand, together with the Bank for International Settlements Innovation Hub in Hong Kong, announced their collaboration on a “Multiple CBDC Bridge” (m-CBDC Bridge) project to explore using distributed ledger technology to support real-time cross-border payment transactions on a 24/7 basis.

M-CBDC Bridge’s aim is to alleviate the current pain points in cross-border fund transfers, such as high costs and complex requirements for regulatory compliance.

Using enterprise Ethereum blockchain technology, the m-CBDC Bridge is a multi-currency CBDC platform for central and commercial banks to streamline key financial, economic and regulatory activities, according to the Bank for International Settlements Innovation Hub in Hong Kong.

Central banks can issue the CBDC, which commercial banks can use to perform cross-border payments and fund transfers instantly. Central banks can also automate their regulatory operations, such as monitoring banks’ wallets and transactions in real time, setting threshold limits for their currency, and reducing the balance of commercial banks with holdings above the limits. Commercial banks can also provide automated reporting required for compliance with local regulations.

“We are grateful for the participation from the private sector including two securities exchanges, banks, and multi-national corporates in the project,” Lee said. “Such collaborative efforts give us much greater confidence that the ideas and solutions generated through this project would take account of the needs of various market players in different markets.”

The m-CBDC Bridge project is an expansion of the earlier Project Inthanon-LionRock CBDC collaboration between Thailand and Hong Kong. That project, which included the participation of 10 banks, developed a prototype network for a THB-HKD cross-border payment corridor using distributed ledger technology.

Earlier this month, Thailand announced that it was exploring a general purpose CBDC “to meet the needs of the general public, improve service efficiency in the business sector, and increase access to financial services.”

Japan too, recently announced that it would start its general purpose CBDC proof of concept this spring.

In South Korea, Shinhan Bank, one of the oldest banks in the country, recently announced that it had developed a pilot of a blockchain-based CBDC platform for retail use with conglomerate LG Corp. in preparation for a potential Bank of Korea-issued CBDC.

China, which started work on its digital currency electronic payment (DCEP) initiative in 2014, is the farthest ahead. The country has been conducting mass trials of its DCEP digital yuan for retail use by the general public. While an official launch date has not been announced, many analysts believe it could be imminent.