The HKMA has called for additional research to assess the feasibility and impact of introducing a retail CBDC in Hong Kong. Image by MMollaretti, Adobe Stock.

As financial institutions worldwide explore the adoption of digital currencies, Hong Kong’s stance on its own Central Bank Digital Currency (CBDC), known as e-HKD, remains cautious. A recently published report by the Hong Kong Monetary Authority (HKMA) highlights both the opportunities and challenges surrounding the implementation of a retail CBDC in the special administrative region.

Though the HKMA recognized the potential advantages of e-HKD—including faster and more cost-efficient transactions—the authority concluded that more research is necessary. This uncertainty comes despite Hong Kong’s clear ambitions to solidify its reputation as a virtual asset hub, demonstrated by its granting of the first set of licenses for cryptocurrency trading platforms earlier this year.

Potential Advantages of Retail CBDC: More Than Just Digital Money

The HKMA’s recently concluded Phase 1 of its pilot program was implemented to evaluate the feasibility and potential benefits of e-HKD. The pilot highlighted three primary areas where a retail CBDC could add value: programmability, tokenization, and atomic settlement. These features could bring in a more efficient and inclusive financial ecosystem in Hong Kong, potentially redefining how transactions are conducted.

The authority also cautioned that the pilot programs involved a limited number of firms and were conducted in a controlled environment, however. As such, whether these advantages would scale effectively in a broader, real-world context still needs investigation.

Roadblocks and Concerns: An Uncertain Path Forward

While Phase 1 yielded promising results, the report also identified “minor frictions” that could become more prominent or even unacceptable in a larger-scale implementation. The HKMA mentioned that understanding the implications of these frictions is essential for the next phase of research, especially in a bustling financial center like Hong Kong.

The need for additional investigation is not solely confined to understanding these frictions. It extends to fully grasping how a retail CBDC might fit into Hong Kong’s existing financial ecosystem and its role in facilitating new forms of economic transactions while maintaining financial stability.

Regulatory Framework and Next Steps: What Lies Ahead for Hong Kong and Retail CBDC?

Hong Kong has not been idle in its quest to become a leading player in the digital asset industry. Earlier this year, it initiated a new regulatory regime and has since awarded licenses to cryptocurrency trading platforms.

Project e-HKD, initiated in 2021, is another step in that direction. The HKMA now plans to “explore new use cases for an e-HKD and delve deeper into select pilots.”

According to the report, the ultimate decision to issue a retail CBDC in Hong Kong will depend on market development and the outcome of further in-depth studies. Further intensive research will determine whether the e-HKD can bring about the envisioned benefits without compromising Hong Kong’s financial stability.