The advent of blockchain technology has catapulted the concept of central bank digital currencies (CBDCs) into the global spotlight, igniting discussions and research worldwide.
Hong Kong is leading the financial revolution with its e-HKD project, managed by the Hong Kong Monetary Authority (HKMA).
Since 2017, the HKMA has been diligently exploring the potential of a digital Hong Kong dollar, primarily focusing on developing a retail CBDC for the general public and businesses.
The e-HKD Project
The HKMA has adopted a three-rail strategy for the e-HKD project to ensure a comprehensive and well-structured approach.
The first rail focuses on foundational layer development, while the second focuses on pilot programmes. These two rails are expected to converge into the third rail, marking the official launch of the e-HKD.
Although the HKMA has not committed to a specific timeline for introducing the e-HKD to the public, it remains open-minded and vigilant in monitoring international CBDC developments.
In November 2022, the HKMA embarked on the first phase of the e-HKD’s pilot programme, collaborating with prominent industry players such as Alipay, Visa, Bank of China, Standard Chartered, and HSBC.
Participants were given the freedom to design their hypothetical versions of the e-HKD, exploring various use cases, including fully-fledged payments, programmable payments, offline payments, tokenised deposits, settlement instructions for Web3, and settlement of tokenised assets.
The second phase commenced in March 2024, building on the success of the first phase, which concluded in October 2023.
This phase, scheduled to continue until mid-2025, aims to delve deeper into the findings from the initial phase, with a particular emphasis on programmability, tokenisation, and atomic settlement. The second phase will also introduce a sandbox program for participants to develop wholesale CBDCs.
Potential benefits for Hong Kong residents
The adoption of the e-HKD promises a myriad of benefits for Hong Kong residents. One notable use case is mortgage lending. By leveraging the e-HKD’s programmability and atomisation capabilities, borrowers could access loans from multiple lenders simultaneously, securing the most favourable interest rates.
The tokenisation and fractionalisation of property rights would enable secured lending for smaller amounts. At the same time, lenders could offer more competitive rates by issuing loans using smart contract-enabled e-HKD, mitigating credit risk.
Meanwhile, the entire mortgage process could be significantly streamlined and expedited, from application to approval and disbursement. The e-HKD also has immense potential for facilitating the tokenisation of assets such as bonds, funds, precious metals, and real estate.
According to Boston Consulting Group, Hong Kong has approximately HK$36 trillion (US$4.6 trillion) worth of assets that could be tokenised, with residential property accounting for the majority.
Digitally representing these assets on blockchains makes them more liquid, accessible, and efficient to trade. As financial institutions increasingly invest in virtual assets, a digital currency on blockchains will make settlement more accessible and more efficient, according to Raymond Chan, vice-chairman of the Institute of Financial Technologists of Asia.
For retail investors, the e-HKD could democratise access to investment opportunities that have traditionally been cumbersome and costly due to onerous onboarding processes, minimum investment sizes, steep subscription fees, and long settlement periods.
A recent report by Arta TechFin, Web3 solutions company Emali, and PwC suggests that retail investors could broadly utilise the e-HKD to manage and make small investments.
The report outlines retail investors’ challenges when dealing with wholesale financial products, including complex onboarding procedures, high minimum investment thresholds, substantial subscription fees, and prolonged settlement times.
By integrating smart contracts into the digital currency, even small investments held for brief durations could generate income for retail users in an automated manner. Fund managers would also benefit from reduced counterparty risk and the potential to increase their assets under management.
Economic impact and regulatory considerations
The adoption of new payment systems, including the retail e-HKD and stablecoins, has the potential to add HK$160 billion (US$20.4 billion) to Hong Kong’s GDP by 2032, representing an additional 0.5 percent GDP growth per year, as reported by Boston Consulting Group.
However, to fully realise these benefits, the Hong Kong government must prioritise security and privacy protection, guided by a clear regulatory framework surrounding the e-HKD.
While the e-HKD holds great promise, some experts argue it has a long way to go. Other tokenised payments, such as tokenised deposits or stablecoins, can provide similar benefits and mitigate credit risk.
Allen Huang
According to Allen Huang, associate dean of Hong Kong University of Science and Technology School of Business and Management, people may also recognise the trade-offs between these digital currencies, depending on factors such as interest payments, use cases, acceptance ratio, and convenience level.
In times of crisis, people may flock to sovereign money like the e-HKD, but alternatives that offer interest, such as tokenised deposits, may prove more appealing during stable periods.
Hong Kong’s crypto landscape
In parallel to the e-HKD project, Hong Kong has been striving to reclaim its position as Asia’s crypto hub.
In June 2023, the region officially launched its crypto licensing regime for virtual asset trading platforms, allowing licensed exchanges to offer retail trading services.
Furthermore, in December 2023, the HKMA, the Financial Services, and the Treasury Bureau jointly proposed a licensing requirement for all fiat-pegged stablecoin issuers. The HKMA launched a sandbox programme for stablecoin issuers in March 2024 to facilitate discussions on this proposal.
Forging ahead with e-HKD
As Hong Kong forges ahead with its e-HKD experiment and crypto-friendly initiatives, it is clear that the city is at the vanguard of shaping the future of digital currencies.
The successful implementation of the e-HKD could revolutionise the financial landscape, offering residents a more efficient, inclusive, and innovative monetary system.
While challenges remain, such as ensuring robust security measures, establishing a clear regulatory framework, and navigating the competitive landscape of tokenised payment options, the potential benefits are vast.
Financial institutions stand to gain significantly by embracing these emerging technologies. Tokenised payments allow them to offer the same services at dramatically lower costs while opening new products and service opportunities.
As the world watches, Hong Kong’s journey towards a digital financial future is a guiding light for other nations, paving the way for a new era of financial innovation and inclusion.
Featured image credit: Edited from Freepik