HKMA Signals e-HKD Launch for Cross-Border Payments, DeFi
In a move that could benefit China immensely, the Hong Kong Monetary Authority (HKMA) has signaled its plan to build a retail central bank digital currency (rCBDC). The discussion of a possible implementation of e-HKD in the future follows two rounds of market consultation to which 75 responses were received and most of them supportive, the central bank says.
While the e-HKD will seek to make payments more effective and support the digital economy, it will help Hong Kong in its strive for global fintech supremacy, especially as Singapore recently unseated Hong Kong in the world financial center rating. With the Special Administrative Region of China also likely to be the home of the world’s first CBDC exchange, the e-HKD could also open up the cross-border use of CBDCs.
e-HKD could foster cross-border payments
According to a Bank of International Settlements (BIS) advisor, Daniel Eidan, the multiple CBDC (mCBDC) Bridge platform that is presently being tested in Hong Kong completed its first CBDC pilot involving four jurisdictions successfully. The mBridge is a co-creation project that aims to join up national CBDCs in common interoperable platforms to enhance financial infrastructure to support multi-currency cross-border payments. It seeks to offer the potential to improve today’s systems’ limitations.
The pilot had over 160 cross-border payments and foreign exchange transactions totalling more than $22 million in value between 20 participating commercial banks, Eidan noted. It was carried out through the HKMA, Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.
e-HKD could be CBDC for crypto and DeFi
While it might not have an imminent role to play in the current retail payment market, the HKMA believes prospective use cases for e-HKD can emerge quickly out of the rapid evolution in the digital economy. Like any other CBDC, it can also serve in the search by the international financial community for more efficient cross-border payment and remittance solutions between jurisdictions’ payment systems, the HKMA states. It adds in its working paper:
“Similarly, there has also been discussion in the international financial community on the potential application of CBDC to the crypto and decentralised finance (DeFi) space to provide an anchor of stability in the relevant markets, especially since the recent failures of several highly-visible private sector crypto-asset initiatives have demonstrated how private sector stablecoins, if not subject to robust regulation, are ill-suited as a means of payment.”
The foundations for and the implementation of the rCBDC will be laid by the HKMA through the adoption of a three-rail approach in preparing for the e-HKD. Rail 1 will lay the technology and legal foundations for the e-HKD. Rail 2 will take deep dives into use cases, and implementation and design issues relating to e-HKD, including conducting a series of pilots with various stakeholders like banks to make better informed decisions on the design choices for the retail layer of the e-HKD system. It will, among other things, study the pros and cons of using CBDC as the on- and off-ramp instrument for DeFi. Rail 3 will be concerned with launching the e-HKD though a timeline for roll out is indeterminate.