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Hong Kong has set a new course in its exploration of a central bank digital currency (CBDC) by issuing a white paper targeting a retail CBDC.
The Hong Kong Monetary Authority (HKMA) has published a white paper on a retail CBDC called e-HKD. The paper sets out potential technical design options for issuing and distributing a retail CBDC, while making a new arrangement for protecting users' privacy that allows transaction traceability “in a privacy-amicable manner”.
By publishing its white paper, the HKMA becomes part of an increasing global trend of interest and research into CBDC for retail purposes.
However, it is not the HKMA's first foray into CBDC. It began investigating the technology in 2017 as part of a study on the development of a wholesale CBDC that could be used to improve cross-border payments. That programme later grew to be an international cooperation, called mCBDC, with the participation of the Bank for International Settlements, Thailand, China and the United Arab Emirates.
Building on the experience of the mCBDC project, the HKMA launched a retail CBDC project in June this year to analyse the technical component and the feasibility of a digital HKD. The white paper is the result of the technology experimentation study that emerged from this work and is intended to serve as a basis for initiating dialogues.
The agency will discuss the feasibility of issuing an e-HKD in a separate report, including analysing use cases, benefits and risks related to data privacy, anti-money laundering and cybersecurity.
A retail CBDC will be seen as the next step for HKMA on its digital currency journey following its previous exploration of a wholesale version. However, as one industry insider told VIXIO, it is a very different challenge: “CBDC is good for settlement, but as far as extending for retail purposes is a huge technical challenge in terms of scaling for mass payments.”
Hong Kong had undertaken a number of payments modernisation initiatives in recent years, including the launch of instant payments system in 2019.
Separate but connected
The HKMA proposes a two-layer architecture that would create both a wholesale and a retail CBDC system. The architecture would allow the central bank to issue and redeem the CBDC in the wholesale system, while commercial banks would use the retail system to distribute and circulate either a retail CBDC or CBDC-backed e-money.
Through this separate but connected arrangement, the HKMA proposes to decouple the two layers as much as possible to minimise the effects of a potential cybersecurity attack and guarantee user privacy by preventing the central bank from recording any retail balances.
Only intermediaries, such as payment service providers, would participate in both layers and serve as the only channel for cross-layer communications.
The HKMA believes that user privacy is a key success factor that determines the adoption of a retail CBDC by the general public, especially if it wishes to convince them to switch from cash.
Privacy conundrum
Earlier this year, the European Central Bank (ECB) laid out a similar approach that intends to overcome the trade-off of privacy from the need to combat crime. In a report as part of its consultation, Fabio Panetta, executive board member of the ECB, argued “privacy could be maintained through technology and the segregation of data that could be put together by competent authorities if they needed to expose illicit activities”.
China, which has been at the forefront in the development of a general-purpose CBDC, expects to launch a digital yuan in 2022, with the aim of bolstering its digital economy, financial inclusion and efficiency.
The People’s Bank of China (PBOC) proposes a model of controllable anonymity that will protect against criminal use by ensuring that banks can track all payments the users make.
To protect privacy, the PBOC plans to establish a tiered authorisation system with checks and balances. However, some experts believe that the digital yuan could become a tool for the Chinese government to increase state control of the payments system, and closely monitor transactions and personal behaviour.
Given recent events in Hong Kong and the greater influence that China is asserting at first sight it looks as if the HKMA vision of a retail CBDC appears to be deviating from that of the mainland, particularly around the issue of privacy.
