The Hong Kong Monetary Authority (HKMA) has issued a technical perspective paper on central bank digital currencies (CBDCs), suggesting two viable designs but also finding seven issues that need to be nailed down before it would be comfortable implementing the “e-HKD”.
The paper [PDF] explores “potential architectures and design options that could be applied to the construction of the infrastructure for distributing e-HKD”. The big issues the HKMA – Hong Kong’s central bank – hoped to address were cross-ledger synchronisation among participants in a CBDC, preventing an oversupply of digi-dollars, ensuring privacy, and allowing both wholesale and retail uses of an e-HKD.
The HKMA is at pains to point out that the document is not an endorsement of a CBDC, but rather a discussion-starter about how one could be implemented.
It’s not short of ideas on the latter, pondering four distribution models and two architectural designs.
But the document is ultimately inconclusive because even with all of the above considerations, the HKMA found seven deeper issues it thinks must be resolved before a CBDC can be implemented.
The seven are:
- Privacy – both to protect user anonymity and to allow detection of manipulation;
- Interoperability – Between existing financial market structures and emerging fintech constructs that use different cryptocurrencies or blockchains;
- Performance and scalability – Because security overheads could make CBDCs less useful, and due to the need to handle very large numbers of users;
- Cybersecurity – Defining attack vectors and standards to repel attacks, in the service of both resilience and transaction security;
- Compliance – So that a CBDC doesn’t make measures designed to curb money laundering harder, or circumvent laws against financing terrorism;
- Operational robustness and resilience – The system has to be able to cope with sudden spikes in demand for digital currencies, and as with everything digital, connectivity must have failsafes;
- Technology-enabled functional capabilities – Do CBDCs improve existing business? What features are needed to deliver benefits current payment mechanisms do not?
That’s rather a lot of unanswered questions, and fundamental ones at that.
Readers may therefore not be surprised that the document suggests more work needs to be done before the HKMA gets close to feeling comfortable introducing a CBDC.