Hong Kong financial regulators should adapt a cross-border perspective when developing both retail and wholesale uses for the digital Hong Kong dollar, or e-HKD, if the city is to cement its reputation as a digital finance hub and an offshore renminbi finance centre, according to a local think tank.
Our Hong Kong Foundation (OHKF) recommended in a recent report that, in cross-border wholesale use cases, Hong Kong should aim to develop itself into a hub for regional or global central bank digital currencies (CBDC) by connecting the e-HKD with other CBDCs as part of the “Multiple Central Bank Digital Currency Bridge” project.
“At this moment, the Chinese mainland still focuses on retail-use cases of the digital renminbi [e-CNY]. But I think, as an international finance centre, Hong Kong should start considering building its financial infrastructure networks proactively now to facilitate the cross-border wholesale use cases of CBDCs, which are anticipated to grow in the future,” said Stephen Wong, deputy executive director and head of public policy institute at the foundation.
According to the OHKF report, Hong Kong should take full advantage of its close ties with the mainland and its first-mover advantage as one of the participants in the m-CBDC Bridge. Hong Kong should invite other economies with relatively mature wholesale CBDC development that share close economic ties with Hong Kong, such as Japan, Singapore and Switzerland, to join the m-CBDC Bridge. After more CBDCs join, Hong Kong than can play the connectivity role, according to the report.
In February, the Hong Kong Monetary Authority (HKMA) announced it had teamed up with the Bank of Thailand, the Central Bank of the UAE, the People’s Bank of China (PBoC), and the Bank for International Settlements Innovation Hub Centre in Hong Kong to work on the m-CBDC Bridge, with the goal of creating a system for cross-border payments using distributed ledger technology.
With mainland economy continuing to strengthen, the demand for cross-border exchange of the e-CNY will rise, whereas Hong Kong can play its existing advantage as a major global intermediary and explore opportunities to become an important transit platform for overseas exploration of the e-CNY, according to the report.
“Currently, blockchain application in international trade mainly focuses on documentation, not on payment. The development of CBDCs, including e-CNY, and the establishment of the m-CBDC Bridge provide practical and convenient solutions to further the renminbi internationalisation,” Wong said.
The think tank also recommended Hong Kong explore more use case scenarios for wholesale CBDCs in the financial industry, such as considering how to integrate CBDCs with the existing Central Clearing and Settlement System in Hong Kong to improve payment efficiency in share trading.
The think tank said the m-CBDC Bridge can be linked with other mechanisms such as stock exchanges and blockchain trading platforms, which could give Hong Kong the potential to act as a bridge between mainland and international capital flows.
For promoting cross-border retail use cases of the e-HKD, the foundation recommends that the HKMA cooperate with the PBoC to launch a dual-currency digital wallet featuring digital e-CNY and e-HKD to facilitate cross-border payments. The HKMA in June announced it will study the feasibility of using e-HKD for retail transactions.
This wallet could be tested first in the Guangdong-Hong Kong-Macao Greater Bay Area, with a currency exchange function to facilitate the conversion between e-CNY and e-HKD, and a restriction on available cities, maximum balance, spending limit or application scenarios to minimise the risk of such a pilot programme. The cross-border application of CBDCs will help promote capital flows within the city-cluster area.
“The emergence of the e-HKD does not just indicate more payment efficiency. It means a new financial technology ecosystem will develop in the future,” Wong said. “More start-up players can participate in the business without being restrained by the current existing e-commerce and payment ecosystems in Hong Kong. This can bestow more transparency, standardisation and innovation for customers in consuming financial services.”
The think tank said Hong Kong should explore implementation strategies to extend the retail use case for e-HKD, from simple use cases such as bill payments, public transportation, government subsidy payouts, and digital payment option for overseas tourists, to complex use cases such as health insurance claims and bond coupon payments.
At the policy level, Hong Kong should formulate a comprehensive digital financial development strategy, and consider establishing a joint CBDC steering group, the foundation said.