Hong Kong Monetary Authority Set to Lay Foundation for Development of Retail CBDC

The Hong Kong Monetary Authority (HKMA) announced on Friday plans to commence the development of the central bank digital currency (CBDC) for retail use. In recent public participation, the community urged the HKMA to take an implicit move to lay the proper foundation for the implementation of retail CBDC (rCBDC).

Since 2017, the Hong Kong financial watchdog has been exploring ways to develop the digital fiat e-HKD. The attempt to cope with emerging economies has compelled Hong Kong to host multiple rounds of market consultation.

Significance of e-HKD

Interestingly, most of the recent public consultation respondents urged the HKMA to collaborate with other regulatory agencies to develop and implement retail CBDC. In honor of the community proposals, the HKMA has announced plans to conduct extensive research on the application, implementation, and measures to issue the retail CBDC.

Subsequently, the HKMA plans to engage the public and private sectors in pilot trials of the retail CBDC. It was reported that the HKMA would engage around sixteen banks and other firms in the payment sector to experiment with the use case of e-HKD.

In 2022 the HKMA issued a report containing the three main phases of developing the CBDC.In the initial phase, the central Bank outlined the legal and technological processes of developing the e-HKD.

The second phase involved the design of the CBCD, which would take two to three years to create. Earlier, the HKMA had announced the successful completion of the e-HKD design.

The third phase would involve the implementation of the e-HKD. At this stage, the HKMA would work closely with the best-performing banks in the region, such as the HSBC and Hang Seng Bank, to conduct the final trials of the CBDC.

Consequently, the HKMA team will engage payment companies such as Alipay, Ripple, Mastercard, and Visa, among others, in the final CBCD experimentation.

HKMA Lays Foundation of Development of Hong Kong CBDC

In their report, the HKMA will prioritize laying the foundation for the proposed CBDC. Regardless of the laid foundation for the development of rCBDC, the HKMA plans to develop flexible and practical approaches to accommodate future development in the retail industry.

Per the press release, the HKMA confirmed implementing a three-rail approach toward developing e-HKD.

According to the June 9 announcement, HKMA confirmed that the e-HKD minimally impacts the retail payment sector. However, due to the modest growth witnessed in the digital economy, the HKMA believes that e-HKD will expedite retail transactions in the future.

Earlier in April, the regulatory agencies in Hong Kong issued a detailed report outlining the features of e-HKD. The regulators stated that the e-HKD would be on a permissionless blockchain network.

Led by the regulators private financial institutions in Hong Kong would assist in implementing the e-HKD.

Feature of e-HKD

Reflecting on the characteristic of the e-HKD, the community urged the HKMA to evaluate innovative blockchain solutions for the digital Hong Kong dollar. In a press release dated June 9, the HKMA mentioned that the team behind the e-HKD project would consider exploring “various factors” of the digital dollar.

At the primary development of the e-HKD, the regulators will formulate the policy objective for the currency. Additionally, the regulator will examine the measure applied by other countries on the issuance and the implementation of digital fiat.

The HKMA plans to seek technical advice from experts concerning the development of the subject under discussion. Soon, the HKMA plans to establish a CBDC expert group. This group would constitute experts from different business, education, and government fields.

Remarkably the HKMA efforts mirror the actions taken by most central banks worldwide. A recent study showed that most central banks are exploring the appropriate designs for digital fiats.

The study illustrated that most apex banks worldwide are investigating the application and implementation of digital currencies.

Nevertheless, officials from the Bank of international settlement (BIS), which controls the operation of global monetary authorities, urged regulators to invest digitalizing financial tools. The BIS also noted that financial regulators are examining ways to maintain the stability of existing financial systems.

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