Yesterday the Hong Kong Monetary Authority (HKMA) issued a discussion paper on a potential e-HKD. It focused on the policy and design issues of a central bank digital currency (CBDC), but in exploring the CBDC motivations, it struggled to find any strong justification apart from innovation. The HKMA has opened a public consultation on the topic.
Last year the central bank issued a technical paper relating to a retail CBDC. As part of Project Lion Rock it has been exploring a wholesale CBDC since 2017. And more recently, it has been involved in the M-CBDC Bridge Project for wholesale cross border payments with the BIS and central banks of China, Thailand and the UAE.
Typical drivers for a retail CBDC involve a decline in cash usage and/or a need to encourage financial inclusion. For example, mainland China cites both of these as justifications for its eCNY. However, in Hong Kong’s case, there’s a high rate of inclusion and cash is still widely used.
The central bank listed five other possible motivations:
- improve availability, usability of central bank money
- compete with new forms of money such as stablecoins
- support innovation
- improve payment system resilience
- monetary policy transmission.
However, in most cases, it argued that these might not be good reasons. The term ‘competing’ with stablecoins is our terminology, not the central bank’s. While it can envisage stablecoin usage expanding beyond crypto trading, it also believes that adequate regulation of stablecoins might mean this is not a reason to justify a CBDC.
Plus, there’s already strong payment system resilience in Hong Kong, and it’s not that keen on a CBDC being interest-bearing. That’s because an interest-bearing CBDC is no longer entirely equivalent to physical cash. Offering positive interest rates could reduce commercial bank deposits, and negative interest rates are pointless while physical cash exists.
On the flip side, there are also challenges in rolling out a CBDC, such as the potential impact on banks that it believes is manageable, as well as cyber security risks and vulnerabilities to power outages.
The paper explores three potential ways of distributing an eHKD via commercial banks. Don’t forget that the Hong Kong Dollar is pegged to the U.S. dollar. So one route involves banks paying the central bank one U.S. dollar for every eHKD 7.80, which is similar to how Hong Kong’s coin system works.
A second option is for commercial banks to pay one U.S. Dollar to buy a Certificate of Indebtedness of HK$7.80. The bank then issues the eHKD as a liability of the commercial bank. This is how cash notes are issued in Hong Kong, which is similar to Scotland. A third way is to use bank aggregate balances for settlement. The central bank prefers the first option.
One other interesting point is a legal one. The central bank believes there may need to be a new legal definition of ‘delivery’ to ensure finality of payment because it might depend on the ledger used.