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LAUNCH OF e-HKD PILOT: A MOVE TOWARDS NEW DIGITAL FINANCE MILESTONE

Central bank digital currencies (CBDC) are an important financial infrastructure in the new era of digital finance. In the middle of last year, the Hong Kong Monetary Authority (HKMA) launched the e-HKD Pilot Programme to work with several organizations from different sectors to prepare for the future.

George Chou

HKMA Completed Pilot Programme Phase 1 to Iteratively Test and Explore Potential e-HKD Use Cases

The HKMA, actively researching CBDC, launched the e-HKD Pilot Programme in May last year, under which it took deep dives into uses cases with several institutions to improve the approach to the possible implementation of an e-HKD in the future.

George Chou, Chief Fintech Officer of the HKMA, said that the HKMA is adopting a three-rail approach at the retail level: It includes Rail 1 which aims to lay the technology and legal foundations, Rail 2 which will take deep dives into use cases and conduct a series of pilots, and Rail 3 which will make more thorough implementation planning depending on the actual progress made under Rail 1 and Rail 2, as well as the pace of local and international market developments. The purpose is to pave the way for possible implementation of an e-HKD in the future.

Programmability contributes to enabling new types of economic transactions

The e-HKD Pilot Programme has recently completed Phase 1. Chou explained that 16 institutions participated in a total of 14 pilots to conduct in-depth study on potential local retail use cases across six categories, covering full-fledged payments, programmable payments, offline payments, tokenised deposits, settlement of Web3 transactions, and settlement of tokenised assets. He also pointed out that due to the fact that the pilot programs were conducted under a controlled environment and on a small scale, further research and assessment are needed. Therefore, the HKMA has not yet decided whether or when to introduce e-HKD.

Chou further said that the relevant report also shows that e-HKD may add unique value in three key areas: programmability, tokenisation and atomic settlement. “Institutions participating in the Pilot Programme believe that the programmable features of e-HKD may potentially unlock new types of economic transactions for consumers and businesses, and enable small businesses to more easily integrate and automate payment-related processes.”

Chou explained that e-HKD, if used or issued on blockchain, could be used to directly settle transactions relating to Web3 and tokenised real world assets, thereby reducing the risk of conversion losses and volatility associated with cryptocurrencies and stablecoins. “Regarding atomic settlement, some pilots have shown that e-HKD may simplify the ‘last mile’ in the payment settlement process, helping to speed up fund settlement and reduce related fees for the merchants.”

Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) and balancing privacy and traceability

Meanwhile, institutions participating in the pilots are also very interested in the application of distributed ledger technology (DLT).Nevertheless, Chou said that although the adoption of DLT may be more effective in promoting the interoperability of e-HKD with other digital currencies or assets, there are still uncertainties in terms of transaction throughput. Therefore, the HKMA remains open to whether to use DLT-based designs.

Referring to the challenges of developing e-HKD, Chou said frankly that privacy and data protection are the important considerations in the design of e-HKD. However, when implementing CBDC, complete anonymity will not comply with international regulatory requirements on AML/CFT. Therefore, a certain degree of traceability would be inevitable and it is necessary to carefully determine the extent of information access to be given to different parties.

Exploring other use cases and keeping abreast of international developments

In Chou’s view, the launch of e-HKD would involve various areas such as legal and regulatory matters, thus careful consideration is required before deciding whether to proceed with it. Phase 1 of the Pilot Programme has provided valuable experience for exploring the potential use cases for an e-HKD. He pointed out several areas worthy of further study, such as considering the positioning of an e-HKD in Hong Kong’s monetary and financial systems, and supporting the industry’s development in the field of innovation.

Chou said that to foster collaboration and knowledge exchange on CBDC research with the academia, the HKMA signed Memorandums of Understanding (MOUs) with five local universities in October last year and established the CBDC Expert Group, whose participants are faculty members of the five universities. Under the MOUs, the group will offer advices, training sessions and workshops pertaining to CBDC and related fintech topics to the HKMA.

“The international financial community is looking for more efficient cross-border payment and remittance solutions. The current research focus on e-HKD is mainly local use cases, but it may bring more potential benefits if the scope of application can be expanded to cross-border payment settlement.” Chou revealed that the HKMA plans to launch Phase 2 of the Pilot Programme this year and may extend it to study cross-border usage of e-HKD. It will also continue to actively collaborate closely with the industry, academia and other stakeholders, and participate in international forums to keep up with the development of retail CBDC in the international market.

Chen Guang

Actively Exploring Hypothetical e-HKD’s Commercial Application Potential

Phase 1 of the e-HKD Pilot Programme tested several innovative use cases, laying the foundation for the future development of an e-HKD. Bank of China (Hong Kong) Limited (“BOCHK”), which is among the first batch of banks to participate in the Pilot Programme, has achieved initial results so far. It will subsequently expand the scope of pilot merchants appropriately and invite external customers to participate in verification for the first time.

Central banks globally have gradually included CBDC in their agenda for development in recent years. Through its participation in the Pilot Programme, BOCHK collected feedback from merchants and customers, and then shared the progress and results of the pilot with the HKMA, focusing on exploring e-HKD’s potential for commercial application.

Verifying prepaid service use cases and building a healthy ecological cycle

Chen Guang, Deputy General Manager of the Digital Currency Task Force of BOCHK, said that the bank is actively conducting verification of use cases for hypothetical e-HKD prepaid services. It also made meticulous preliminary preparations before the official launch of the hypothetical e-HKD pilot, aiming to seize this opportunity to create new business models for retail SMEs.

“The first phase of the pilot is open to BOCHK employees to purchase prepaid service products through BOCHK’s BoC Pay mobile payment app. Subsequently, participating SMEs will invite eligible customers to participate.” Chen said that the hypothetical e-HKD pilot is conducted through BOCHK’s existing BoC Pay and BoC Bill apps to effectively reduce the technical requirements and additional resources allocated to facilitate merchant participation.

BOCHK has successfully applied the programmable features of digital currency in the application of hypothetical e-HKD and conducted pilot testing on prepaid consumption application scenarios. In this pilot, the bank brought in around ten pilot merchants, who can predetermine the conditions for fulfilling prepaid product contracts. During the purchase process, the consumer’s funds are converted into hypothetical e-HKD and bound to the contract, which automatically executes fixed or non-fixed payments according to the contract conditions. The remaining funds can be refunded to the consumer if the merchant is unable to fulfill the contract.

Expanding pilot merchant scope and exploring more application values

Chen said that BOCHK has continuously collected feedback from merchants and consumers. “85% of surveyed merchants believe that the e-HKD pilot can enhance consumer loyalty more effectively than traditional membership reward programmes. In addition, it effectively boosts consumers’ confidence in prepaid services. BOCHK will further optimise its existing solutions, and will also explore value creation opportunities arising from further application scenarios for hypothetical e-HKD based on the HKMA’s plan to take it forward.”