CBDC: Hong Kong Furthers Digital HKD Ambitions

CBDC: Hong Kong Furthers Digital HKD Ambitions

by November 17, 2023

Hong Kong is working towards further integrating the digital yuan (e-CNY), unveiling last week a number of new initiatives designed to increase support of the central bank digital currency (CBDC) in the city. At the same time, the government is pursuing its own digital Hong Kong dollar plans and moving forward in its e-HKD Pilot Programme.

At the 2023 Hong Kong Fintech Week taking place in the city from October, 30 to November 05, Christopher Hui, Hong Kong’s Secretary for Financial Services and the Treasury (FSTB), announced several initiatives designed to support and promote the usage of the e-CNY scheme in the city.

Among these initiatives, Hui said that Octopus Cards, Hong Kong’s homegrown digital payment platform, and Bank of China (Hong Kong) (BOCHK), will be exploring new e-CNY applications scenarios to benefit inbound and outbound visitors between the Mainland and Hong Kong.

These works will build on earlier efforts by the two organizations to integrate and support China’s sovereign digital currency in Hong Kong.

These innovations, which focused on retail payments, payment interconnectivity within the Greater Bay Area (GBA), as well as facilitating cross-boundary consumption, included the launch of Self-service Card Issuing Machines in Lo Wu, Shenzhen.

The initiative, spearheaded by Octopus Cards and Bank of China Shenzhen Branch, and supported by the Lo Wu District Government, allowed visitors from Hong Kong to obtain digital yuan hard wallets from the machines through real-name registration and top them up with Octopus cards. Users would then be able to use their wallets to shop in over 1,400 merchants in the Lo Wu district.

Separately, BOCHK launched earlier this year new e-CNY services and capabilities. These include allowing Mainland visitors to pay retail merchants in Hong Kong using their e-CNY wallets, as well as allowing Hong Kong customers to top up their e-CNY wallets using their Hong Kong personal bank accounts.

These initiatives, which have been successfully launched in Hong Kong, demonstrate the viability of using the e-CNY scheme for cross-boundary transactions, Hui said, paving the way for more future application scenarios and use cases of the e-CNY in the broader GBA.

As the next step, and subject to regulatory approval and technical readiness, Hui said that Octopus Cards will continue to explore other forms of e-CNY applications designed to facilitate transactions for inbound and outbound visitors between Mainland China and Hong Kong as well as increase interoperability between these locations’ respective payment systems.

BOCHK, meanwhile, will continue to enhance its e-CNY offerings for customers to optimize user experience, he added.

China’s digital yuan, which has been in the works since 2014, is being piloted in at least 26 provinces and cities across the country. In Hong Kong, the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China are currently conducting the second phase of the technical trial after completing the initial tests involving cross-border payments using the digital yuan, Hui stated during a fintech event in September 2023.

These tests will involve integrating more banks and piloting the e-CNY’s top-up function through Hong Kong’s real-time gross settlement payment system, the Faster Payment System (FPS), he said.

Hong Kong pursue CBDC efforts

While trials of the digital yuan are still underway in Hong Kong, the city is also testing its own CBDC. In May, the HKMA launched a trial program for the e-HKD system, tasking 16 banks and payment companies with selecting small groups of clients to test specific uses for the digital currency.

The trial focused on six use cases – online payments, payments in shops and restaurants, collecting government payouts, tokenised deposits and asset settlement, and Web 3.0 trading and clearing – and saw the participation of HSBC, AlipayHK, Mastercard, Visa, ZA Bank and Ripple Labs, among others.

HSBC explored in their pilot the use of a private blockchain network to transact e-HKD between consumers and merchants with the objective of testing instant, final settlement at a transaction level.

Hang Seng Bank, HSBC and AlipayHK looked at the viability of a low-cost alternative for merchants to build and execute their loyalty programs using the e-HKD.

Mastercard explored in its pilot the “wrapping” of the e-HKD for use on a non-native blockchain by simulating the purchase of physical items and the contingent exchange of non-fungible tokens (NFTs) on a tokenized asset network.

And Fubon Bank and Ripple explored in their pilot the use of tokenized real estate assets in granting a home equity line of credit to a real estate owner using the e-HKD.

Phase 1 of the e-HKD Pilot Programme concluded in October 30. The next phase of the program will seek to explore new use cases for an e-HKD and delve deeper into select pilots from Phase 1, the HKMA said in a statement.

Summary of e-HKD pilots by category and participant, Source: e-HKD Pilot Programme Phase 1 Report, Oct 2023

Summary of e-HKD pilots by category and participant, Source: e-HKD Pilot Programme Phase 1 Report, Oct 2023

Other fintech efforts

In addition to new e-CNY integration efforts, Hui announced at the 2023 Hong Kong Fintech Festival the launch of other major fintech initiatives designed to modernize the city’s financial infrastructure and promote the virtual assets and Web 3.0 sector.

These initiatives include the development of a new Integrated Fund Platform (IFP), a project which will be led by the Hong Kong Exchanges and Clearing (HKEX) with the participation of the Hong Kong government, the Securities and Futures Commission (SFC) as well as other stakeholders; the promotion of real economy-related virtual assets and Web 3.0 applications such as the tokenization of real world assets and traditional financial assets; and the development of the regulatory framework for virtual assets-related activities.

In particular, Hui shared that the government intends to expand the regulatory remit to cover the buying and selling of virtual assets beyond trades taking place on trading platforms.

As for the regulatory regime for stablecoin issuers, Hui said that the FSTB and the HKMA will issue a joint consultation on the legislative proposal for implementing the regime in due course, inviting feedback from the industry and the public.

The HKMA will also continue to consult the industry on its guidance on banks’ provision of digital asset custodial services to ensure client assets are adequately safeguarded and that the risks involved are properly managed.


Featured image credit: Edited from freepik