CBDCs

Hong Kong has been stepping up activity in central bank digital currencies (CBDC) and is involved in a number of local and global initiatives exploring potential use cases. Future-proofing Hong Kong for CBDCs is one of the five focus areas under the government’s “Fintech 2025” strategy.

Since 2022, the HKMA has been participating in Project mBridge. Organised by the Bank of International Settlements, this project also includes the central banks of the Chinese Mainland, Thailand and the United Arab Emirates. An initial use case of the project is to solve some of the issues with cross-border payments: for example, it is exploring the use of CBDCs for international money transfers, similar to the way the SWIFT system operates.  

Within Hong Kong, Project Ensemble, announced in March this year, is a wholesale CBDC project to develop the city’s tokenisation market. With tokenised assets, especially on the public blockchain, a medium of exchange is required, such as a CBDC, stablecoin, or a tokenised version of a CBDC. Project Ensemble will investigate the infrastructure needed to enable interbank settlement of tokenised money through CBDCs.

Through Project Ensemble, the Hong Kong government intends to connect its own efforts to create a CBDC with private innovation and tokenisation, which are usually carried out by asset managers, banks and tech companies.

Both the mBridge and Ensemble projects are looking at the wholesale and government-to-government aspect of CBDCs. On the retail side, the HKMA is also now continuing its second phase of its e-HKD programme. Phase 2 will further explore the use cases from phase 1, where 16 companies performed deep dives into areas of eHKD use including full-fledged payments, programmable payments, offline payment, tokenised deposits, settlement of web3 transactions, and settlement of tokenised assets.

Overall, we see an increased interest in CBDC from the private sector and the government. However, there are challenges that will need to be solved in order to make CBDCs, and distributed ledger technology (DLT) more generally, viable for wider economic use.

So, besides the current initiatives in Hong Kong to encourage the development of CBDCs, efforts will need to be made to address the current concerns surrounding the technology. Banks in Hong Kong should be proactive in working with the regulators and lawmakers to set common standards around interoperability, programmability, and data and privacy, to ensure a smooth path for the ongoing development of CBDCs.

Ultimately, banks are facilitators for the financial and monetary ecosystem. To avoid the risk of becoming obsolete, it is important for banks to future-proof themselves for alternative payment infrastructures. This is not something that can be built up overnight, and banks need to start developing their people and systems today in order to be ready for the future.