Hong Kong’s New CBDC Prototype Set to Disrupt Commercial Transactions
On October 21, the Hong Kong Monetary Authority, in conjunction with the Bank of International Settlements (BIS) Innovation Hub, debuted the first prototype for its Aurum retail Central Bank Digital Currency (CBDC). The system, the first developed of its kind, reflects the intricacies of Hong Kong’s existing financial system and was built to support retail adoption in the special economic zone.
Dubbed “Aurum”, the Latin word for gold, the new CBDC is meant to reflect the stability, robustness, and trustworthiness of gold as currency. The project was twofold: develop an interbank system for digital currency, and a retail e-wallet system. The e-wallet is created at a local bank with a smartphone application. Validator systems prevent bank over-issuance and user double redemption.
The intermediate retail CBDC is used in the e-wallets. CBDC-backed stable coins are used in the interbank system, and interesting development in the roadmap. The CBDC-backed stable coins digitally mirror Hong Kong’s current system, where bank notes issued by the financial system are backed by the central bank. As such, the CBDC is the direct liability of the Central Bank, while the stable coins are liabilities of the issuing banks, backed by assets held by the Central Bank. Indeed, as the authors stated:
“Bringing CBDC-backed stablecoins to life has never been done before and we therefore felt that doing so may supplement the growing body of research on private sector stablecoins. Indeed, what distinguishes Aurum from private sector stablecoins is that Aurum’s stablecoin balances are reconciled, versus real time gross settlement (RTGS) balances of the issuing bank with the central bank.”
Most notably, Aurum has focused on maintain a critical feature in blockchain: privacy. According to the report, the two-layered system architecture (interbank system and e-wallet) means that only intermediaries who perform Know-Your-Customer (KYC) verification and directly handle rCBDC transactions can access the identity of the token holder. The Central Bank does not have access to this information, enabling retail user privacy. The system also uses cryptographic aliases as identity in rCBDC transactions.
In other words, the proposed architecture preserves user anonymity from the validator infrastructure, through a pseudonym system, which only uses public keys in transactions, while making the connection between real identities and public keys known only by intermediaries.
The double spend problem, a common issue addressed in most blockchains, was a focus of safety here. The Aurum system is designed such that the wholesale interbank system can identify and address:
- Over issuance: preventing the banks from issuing more rCBDC that the wCBDC asset banks own.
- Double issuance: preventing banks from using the same wCBDC asset to issue rCBDC repeatedly.
- Double redemption: preventing banks from using the same rCBDC to exchange for WCBDC repeatedly.
Furthermore, BIS also emphasized safety, focusing on cyber resilience as a critical factor in the rCBDC’s success. According to the report, wCBDC issuance is restricted to only the wholesale system. Cross-ledger synchronization ensures sufficient decoupling between wholesale and retail ledgers, implementing principle network segmentation. Intermediaries serve as security gateways between wholesale and retail systems, preventing attacks from the retail system. Interactions between the wholesale and retail systems has also been minimized, lowering the attack surface.
Beijing Not Far Behind
China has been expanding its e-CNY digital currency around to larger provinces in the region, including Jiangsu, Hebei, and Sichuan. Over the past two years, China has been conducting trails of CBDCs in cities across the country. Conducted in the form of lotteries, citizens win relatively small denominations of currency and merchants have been strongly encourages to accept payment.
As of January 2022, around 261 million users have opened e-CNY wallets and have conducted around $13 billion worth of transactions. China has been operating in a mostly cashless system for many years, accepting payment digitally through apps like WeChat. They hope to transition away from traditional cash payments and fully implement digital yuan transactions through CBDCs, which were first introduced in 2020.
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