After India and China, Now Hong Kong Accelerates CBDC Work With a Special Twist: Here’s What We Know

By Tech PiWay On Apr 26, 2023

Hong Kong is set to become the latest nation-state to accelerate its work on Central Bank Digital Currency (CBDC) payments with a unique twist. As the global race to embrace CBDCs intensifies, with India and China leading the charge, Hong Kong is determined to provide a distinctive approach to the development of its digital currency that capitalises on its fintech capabilities and forward-thinking stance. In this article, we take an in-depth look at why Hong Kong is taking positive steps towards the implementation of CBDCs, the level of preparedness and the potential impact that such a move could have.

1. Understanding the Special Twist Behind Hong Kong’s Drive for a Central Bank Digital Currency

The Hong Kong Monetary Authority has set out to transform Hong Kong into an international platform that leads the way in digital currency. To do so, they have innovated a ‘two-tier’ system to facilitate the deployment of a Central Bank Digital Currency (CBDC). This system mirrors the current monetary system, and has special nuances that set it apart.

Specifically, there are two facets to Hong Kong’s two-tier system:

Payment Stabilization Fund: consists of a Central Bank Digital Currency (CBDC) and a Reserve Bank Account, both linked to a Payment Stabilization Fund.
Payment System Reform Fund: an independent body that is responsible for developing and issuing a locally developed CBDC.

Combined, the two funds will ensure the CBDC is issued in a safe and secure manner, and offer monetary stability in the region.

2. Benefits of the Hong Kong CBDC for Asia’s Fintech Industry

The establishment of a Central Bank Digital Currency (CBDC) in Hong Kong is a major milestone for Asia’s fintech industry, with the potential to bring numerous benefits and opportunities to the sector.

Bring Financial Inclusion – A Hong Kong CBDC can provide access to those who are unbanked or underbanked and help them access financial services quickly and easily.
Lower Transaction Costs – The CBDC can reduce the financial costs associated with digital transactions, making it easier for banks and other financial institutions to participate in the digital economy.
Reduce Fraud – By leveraging the latest blockchain technology to eliminate the chance of fraud, a CBDC can reduce the amount of time and money spent on verifying and securing digital transactions.
Boost Efficiency – With the inherent security of a CBDC, transactions can be completed quickly with less time and effort spent on verifying and validating payments.

In addition to these advantages, the CBDC can also encourage more innovation in the sector, as firms look for ways to leverage the technology to create new products and services. This could lead to increased competition and the development of more sophisticated financial solutions that cater to the needs of the digital economy.

3. Expected Timeline for the Launch of the Hong Kong CBDC

The Hong Kong Monetary Authority has announced that it is planning to launch the Hong Kong Central Bank Digital Currency (CBDC) on a controlled basis. As part of the two-tier prototype, a CBDC retail pilot exercise is expected to be carried out in the second quarter of 2021. This exercise will involve selected retail scenarios, leveraging existing banking infrastructure.

The objectives of the pilot exercise include:

Testing the capabilities of the proposed system, including customer usability and appropriate system security and resilience
Examining the interactions of the system with real-world business operations, such as compliance and operations considerations
Gathering experience for the conduct of future initiatives, such as a wider roll-out of the CBDC

It is expected that the pilot exercise will help determine the necessary regulatory and operational considerations, and whether a wider roll-out of the CBDC is suitable at this stage. Regulatory approval would be required before the CBDC can be made widely available to the public.

4. Innovative Strategies Adopted by Hong Kong in Regards to CBDC Development

Hong Kong is leading the charge in CBDC development, driven by the innovative strategies employed by the financial regulator and the banking sector. The strategies have the intention to enable financial inclusion and the advancement of e-payments.

Supportive Regulatory Environment: The government has enabled the banking sector to assess and integrate emerging technologies, such as distributed ledger and blockchain, necessary for CBDC development.
Private Sector Driven: The country allows the private sector to take ownership of the development and governance of CBDC initiatives. For example, a consortium of banks led by the Hong Kong Monetary Authority (HKMA) and the Financial Service and Treasury Bureau has been created and called Project Lionrock.

To date, over 47 organizations, with many coming from the fintech space, have joined the initiative to create an open, secure and consensus-driven environment that accelerates experimentation and the deployment of CBDCs. The country also works to foster digital financial services through active dialogue and consultation between the government, regulators, industry and academics.

It’s become increasingly clear that Hong Kong is ready to join India and China in the race to issue a central bank digital currency (CBDC). The Hong Kong government’s support of the project is an indication of the prioritization of this effort. With the added benefit of access to the mutual distributed ledger framework, it seems as though Hong Kong is well positioned to further expand their CBDC’s reach and promotion. These developments should be an exciting time for any onlooker who is interested in the rise of CBDCs, and Hong Kong’s unique approach should inspire optimism for what’s to come.