Hong Kong Seeks Views on e-HKD in Response to Stablecoins’ Threat
While still working on a regulatory approach to stablecoins for the potential financial stability risks it says they pose, the Hong Kong Monetary Authority (HKMA) has issued a discussion paper on introducing a retail central bank digital currency (rCBDC), e-HKD, to address their challenges.
The HKMA is taking its CBDC journey which first began in 2017 to another level with the issuing of the “e-HKD: A policy and design perspective” and inviting views from the public including industry players on key policy and design issues.
The sought views are to help come up with “appropriate functionalities and attributes” that could position the e-HKD “for the challenges of alternative units of account (i.e. stablecoins) dominating in Hong Kong, even though such possibility remains remote.”
Stablecoins continue to gain global attention particularly as how the interoperability of the various CBDCs to be issued by central banks would be managed is still being debated. The UK recently legislated to bring certain stablecoins into the country’s payments framework even as Bloomberg puts the total market cap of stablecoins at about $180 billion as of February 2022 having grown by 480% in a year (from $38 billion) – a total of $49.3 billion has been transacted in USDC alone as of May 2.
The HKMA is not ruling out the possibility of a popular stablecoin emerging eventually following continued developments in their space. It believes the widespread use of these stablecoins particularly for offering better payment, remittance or domestic goods or services pricing could undermine the role of the domestic currency as the single unit of account.
To better prepare for future challenges as the first to position its planned CBDC in direct response to stablecoins, the HKMA says it is introducing the e-HKD to “support the continued use of Hong Kong dollar as the single unit of account in Hong Kong and reduce the risk of alternative units of account dominating.” Hence its solicitation for views on the rCBDC’s design to meet the needs of the public and “be economical, secure against fraud, free of any market risk or issuer default risk, user-friendly and efficient.”
“If a stablecoin becomes widely used by the general public with relative ease, there is also an added risk of undermining payment integrity due to potential operational or financial failures of these stablecoins, or accelerating the flight to these stablecoins during any financial crisis period, thereby undermining the control of central banks over local monetary conditions,” it states in the paper.
The regulator adds that the e-HKD could impact Hong Kong’s currency, its financial stability, and its international financial centre status. Also, with its potential programmability aspect, could enable innovative applications such as smart contracts when properly addressed.
The HKMA has been actively working with other central banks and the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre on wholesale CBDC (i.e. Multiple CBDC Bridge). It started working on Project e-HKD in June 2021 to study the feasibility of a rCBDC in Hong Kong.