Hang Seng Bank Investigates Significance of Programmability in e-HKD CBDC Adoption

Hang Seng Bank Investigates Significance of Programmability in e-HKD CBDC Adoption

by February 1, 2024

Programmability is a crucial feature for future payment innovation, an attribute which should be integrated into the e-HKD scheme should the central bank digital currency (CBDC) be issued, a new report by Hang Seng Bank and global management consulting firm Oliver Wyman says.

The report, titled “Envisioning Programmable Payments in Hong Kong”, provides insights into the use cases, feedback, and implications of the e-HKD pilot conducted by Hang Seng Bank, emphasizing programmability, traceability and interoperability as essential components of a hypothetical e-HKD scheme and highlighting these features’ potential in mainstream digital payments.

Hang Seng Bank conducted a pilot of the e-HKD system in September 2023, testing the scheme in three particular use cases: government grant disbursement, merchant reward program, and peer-to-peer (P2P) transfer.

These trials involved Hong Kong Cyberport Management Company, the Chinese University of Hong Kong, 176 individual consumers, seven merchants and 30 enterprises. A total of 1,296 transactions and transfers were performed.

In December 2023, Hang Seng Bank issued a report, presenting key insights derived from the pilot program. In particular, the report highlights that thorough testing has revealed the potential efficacy of programmability, traceability and interoperability features in a e-HKD system.

Programmability, which involves the ability to impose conditions on money spending or payment issuance, can provide substantial benefits to individuals, merchants, and the government, the report says, allowing for seamless deployment and automation of retail conditional payments. This could allow less technologically adept institutions and merchants to autonomously design and manage their payment conditions, free from channel restrictions or additional technological demands, it says.

Traceability may also unlock new possibilities for the tracking of e-HKD use and movements in a centralized, accurate and automatic manner, the report states, aiding merchants in tracking the effectiveness of implemented conditional payments.

Finally, interoperability, which refers to the seamless and efficient exchange of information, transaction processing and communication across systems, can be integrated into the e-HKD to connect individuals, merchants, government organizations in one ecosystem.

Potential features and benefits of an e-KYC, Source: Envisioning Programmable Payments in Hong Kong, Hang Seng Bank and Oliver Wyman, Dec 2023

Potential features and benefits of an e-KYC, Source: Envisioning Programmable Payments in Hong Kong, Hang Seng Bank and Oliver Wyman, Dec 2023

Findings from the pilot program also reveal that clear incentives will be essential to drive adoption of an e-HKD for both individuals and businesses.

For individuals, adoption could be driven by improved user experience and certain level of payment incentives. Conversely, for merchants and government organizations, the main incentives are cost efficiency and ease of implementation.

The report also notes that establishing a collaborative participation model is essential for the full potential of an e-HKD retail CBDC to be unlocked. This model should ensure active involvement from the private sector for ongoing experimentation and future implementation, and should define the extent of the sector’s participation.

Lastly, the report notes that a platform that is innovation-friendly is required. This platform should be easy for eligible intermediaries to innovate and implement use cases, it says, adding that the ideal platform would support application programming interfaces (APIs) and interoperable standards to connect different intermediaries.

Hong Kong’s CBDC efforts

Hong Kong has been researching CBDCs as part of its “Fintech 2025” strategy. To pave the way for the potential launch of a digital version of the Hong Kong dollar, the Hong Kong Monetary Authority (HKMA) launched in November 2022 the e-HKD Pilot Programme to explore commercially viable use cases in collaboration with the industry.

16 participants, including Hang Seng Bank, HSBC, AlipayHK and Mastercard, were involved in Phase 1 of the program, which commenced in May 2023 and concluded in October 2023. During Phase 1, a total of 14 pilots were conducted focusing on six use cases: online payments, payments in shops and restaurants, collecting government payouts, tokenized deposits and asset settlement, and Web 3.0 trading and clearing.

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 a retail CBDC, and found that an e-HKD scheme can be made programmable, allowing for vouchers to be automatically disbursed when a customer’s spending fulfills predefined conditions.

Hang Seng Bank also explored in a pilot P2P transfers using the e-HKD. In the pilot, the bank enabled conditional and traceable P2P transfer, allowing payers to customize the prerequisites for the fund to be further used, and track the fund’s utilization.

Findings from the experiment reveal that a e-HKD scheme with embedded programmability and traceability can enhance a payer’ control and visibility on the fund usage, a feature that’s valuable to people engaging services such as errand services and purchasing agents.

Following these experiments, Hang Seng Bank conducted a survey of participating entities to garner their views on the e-HKD system. The results show a high level of satisfaction in processing e-HKD transactions, with 75% of respondents sharing a willingness to recommend e-HKD to others, and 81% expressing a positive attitude towards the use of the Hang Seng e-wallet, the e-HKD e-wallet prototype developed to run the pilots.


Featured image credit: Edited from freepik