Global Perspectives
Deep-dive into global regulatory approaches to Web3 to help you learn more about global policies, opportunities, and cross-border synergies.
In our previous article on the Web3 landscape in Hong Kong, we explored the definition of Virtual Assets (VAs) under Hong Kong legislation, including (but not limited to) whether they qualify as securities, and whether NFTs are considered Virtual Assets. As mentioned, according to the Hong Kong Monetary Authority (HKMA), some digital currencies do not qualify as Virtual Assets, including Central Bank Digital Currencies (CBDCs).
During the eight edition of the Hong Kong Fintech Week 2023, which ended on 5 November 2023, the Hong Kong government as well as representatives of its relevant authorities — first and foremost, the HKMA — shared about the past year of projects, collaborations, policies, and expectations for the future of Hong Kong and the Great Bay Area (GBA).
In this article, we will explore the following aspects of the local CBDC, the e-HKD:
- Overview of Hong Kong’s research into CBDCs
- Definition of CBDCs according to the HKMA
- e-HKD pilot programs in the retail sector
- Future prospects
Central Bank Digital Currencies: e-HKD
What is a Central Bank Digital Currency?
Central Bank Digital Currencies (CBDCs) are a form of digital currency issued by a country’s central bank — in other words, virtual money. A CBDC’s value does not fluctuate the way cryptocurrencies do (e.g., Bitcoin) since it is fixed by the issuer (i.e., the central bank) and equivalent to the country’s fiat currency. According to the CBDC tracker of the Atlantic Council, there are currently 11 CBDCs launched and 21 pilot programs worldwide, including China and Hong Kong.
According to the Hong Kong Monetary Authority (HKMA), Hong Kong’s central banking institution, CBDCs are defined as digital representations of value that are “issued by a central bank or by an entity that performs the functions of a central bank or by an entity authorized by a central bank on its behalf” (LegCo). As per this definition, CBDCs do not qualify as Virtual Assets in Hong Kong (learn more about the definition of VAs here).
Since 2017, the HKMA has been researching the potential applications of CBDCs in its territory.
In July 2021, it started Project e-HKD, a feasibility study on retail central bank digital currency in Hong Kong. The e-HKD Pilot Programme was finally launched in November 2022 (official start on 18 May 2023), for which it invited industry participants to explore and submit potential use cases for the city’s CBDC — launching also its e-HKD Sandbox to test its development and applications.
The key use cases explored by the HKMA included two main sectors:
- Retail use cases through the e-HKD pilots started in 2023
- Wholesale CBDC use cases between the HKMA and other commercial banks and financial institutions to settle large-value interbank transactions.
Exactly one year after its launch, the city’s representatives presented the first results at the Hong Kong Fintech Week 2023 (we were there), where they also announced future developments, as the second phase of the pilot will start in 2024.
e-HKD Pilot Program
In May 2023, the e-HKD pilot for retail use cases was officially started in collaboration with the financial, payment, and tech sector. In its first phase, it included 16 firms across 6 industries, with a total of 14 pilot programs for domestic and retail use cases. The use cases spanned different categories, including:
- Full-fledged payments
- Programmable payments
- Offline payments
- Tokenized deposits
- Settlement of Web3 transactions
- Settlement of tokenized assets
As per the first results reaped, the city identified three key areas where the application of the e-HKD could prove particularly beneficial:
- Programmability
- Tokenization
- Atomic settlements
Below we will explore these three areas explored at the HKFW2023.
Programmable e-HKD
Programmability indicates the ability of programming the exact usage of a token, including validity time frame, use case, merchant, etc.
One of the pilot programs presented at the Hong Kong Fintech Week 2023 was the one carried out by Hang Seng Bank, a local Hong Kong institution, that programmed e-HKD for specific use cases.
What was the pilot about?
The bank collaborated with Cyberport, The Chinese University of Hong Kong, and other enterprises to enable more than 100 individual consumers, CUHK teachers and students and Hang Seng staff to pay with Hang Seng’s hypothetical e-HKD wallet at 7 merchant outlets.
Specifically, Hang Seng Bank created a blockchain for token issuance and an e-HKD wallet to manage the tokens. It applied these to three key use cases:
- Merchant Reward Program: Merchants’ clients (incl. Hung Fook Tong, Pacific Coffee, and Flash Coffee) received programmed tokens in the form of discount coupons to be used on-site according to the pre-set parameters
- Grant Payment: Cyberport allocated funds through the hypothetical e-HKD wallet to 30 selected Cyberport community companies and firms as per the specific purposes and expiry dates
- Peer-to-peer transfers: Personalized transfers to peers via the hypothetical e-HKD wallet according to pre-set terms, e.g., validity period and purpose of funds
Read more about the pilot here.
Tokenized e-HKD deposits
By tokenized e-HKD deposits it is meant the conversion of money held in banks into digital tokens on a blockchain ledger, backed by the bank’s balance sheet.
This year, Visa partnered with Hang Seng Bank and HSBC to explore the potential of tokenized deposits, focusing on B2B to test interoperability and atomicity of on-us and cross-chain payments across two interbank B2B payment flows (Hang Seng and HSBC) using tokenized deposits settled over wholesale CBDC (wCBDC).
What was the pilot about? With the main goal of enabling seamless transfers, faster payments, and higher transaction transparency, while also reducing settlement risk, risk of collateral, and protecting privacy (by making public only selected information), the pilot covered two use cases:
- property tokenization
- acquisition & atomic settlements
Offline e-HKD payments
The Asian branch of ICBC, one of the largest banks worldwide by market capitalization, presented the results of its pilot program for e-HKD offline, cashless payments in Hong Kong.
What was the pilot about? ICBC developed e-HKD physical cards to facilitate the e-HKD on-site payments without disrupting consumers’ experience. The physical card — approximately the size of a credit card — can display the balance and transaction amount, and received an appreciation rate of 95% from the pilot participants (merchants as well as consumers).
With ultra-fast transactions (approx. 0.2 seconds), the pilot was deemed highly successful in its aim to seamlessly introduce e-HKD into the Hong Kong’s market through high settlement efficiency and fast transactions In the future, more use cases will be tested, with a special focus on highly cash-concentrated sectors, e.g., taxi fares.
Read more about Phase 1 of these programs here.
A note on the eCNY, China’s CBDC
While e-HKD is the CBDC of the Hong Kong Special Administrative Region (HKSAR), Mainland China has been testing out its own CBDC — the e-CNY.
The eCNY is being used relatively extensively in China, also thanks to its partnership with some major platforms, e.g., WeChat Pay, Alipay, Meituan, and Jingdong. Most recently, its application was experimented at the 2022 Winter Olympics, the 2023 Chengdu Open tennis tournament, and the 2023 Hangzhou Asian Games.
It is notable to mention that Hong Kong is one of the pilot cities selected by Beijing to test its e-CNY. Supporting the registration in 100 countries, the e-CNY can be purchased through popular methods such as Visa and Mastercard as well as through selected local Hong Kong banks to facilitate adoption.
We will focus on the e-CNY in future pieces.
The path ahead
As announced during the event, the cross-border landscape will undergo significant improvements, focusing on:
- Wholesale CBDC use cases, mostly driven by the BIS Innovation Hub, including the mBridge platform, led by the HKMA together with Thailand, China, and the UAE
- More interbank connections
This article is only intended to provide a summary of the key regulations and other practices carried out in the region at issue. It is not intended to cover all the legal or regulatory issues that may be involved in– or risks that may arise from–the engagement with virtual assets and any other asset or activities mentioned, and it does not intend to provide any kind of advice or suggestion to individuals and/or corporates.
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