HKMA Dialogue Paper on e-HKD

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On 27 April 2022, the Hong Kong Financial Authority (“HKMA”) revealed a dialogue paper “e-HKD: A coverage and design perspective” (the “Paper”), inviting views on key coverage and design points for introducing a retail central financial institution digital foreign money (“CBDC”), often known as e-HKD. This text summarises the important thing points of the Paper.

What’s CBDC?

CBDC is cash issued or backed by the central financial institution that’s each digital and accessible by the general public (i.e. the digital model of cash and notes). It has the potential to have features (e.g. cryptography) relying on design and technical feasibility. It’s distinguished from crypto-assets as it’s issued and backed by the central financial institution – as such, its market worth is much less risky.

Advantages of retail CBDC

(1) Bettering the provision and value of central financial institution cash

Usually, retail CBDC would improve the provision and value of central financial institution money- enabling it for use in methods past bodily money. It would additionally promote monetary inclusion- with retail CBDC, these with out a clearing account with the central financial institution and people in underbanked communities will be capable of use central financial institution cash.

However the above, in Hong Kong, bodily money in circulation stays sizeable and the unbanked inhabitants in small. Thus, the aforementioned advantages might not be very compelling in Hong Kong.

(2) Positioning for the challenges of recent types of cash

Given the rising prominence of stablecoins (learn our article on HKMA’s dialogue paper right here), there’s a risk that the position of the home foreign money as the one unit of account could be undermined. Moreover, if stablecoins turn into broadly utilized in Hong Kong, the management of central banks over native financial circumstances could also be undermined as effectively. That stated, whereas the widespread use of stablecoins in Hong Kong is distant, the HKMA is of the view that Hong Kong ought to gear itself for future challenges. e-HKD may assist the HKMA assist the continued use of the Hong Kong greenback and cut back the chance of different items of account dominating.

(3) Supporting innovation and assembly future fee wants in a digital economic system

Retail CBDC may provide and allow larger innovation in funds and payment-related digital providers. A programmable retail CBDC may allow progressive functions within the digital economic system (e.g. good contracts to facilitate automated fee), it may additionally facilitate the availability of fiscal subsidies to the general public.

That stated, the potential advantages would include dangers and challenges- for instance, dependency on exterior information sources for good contracts may trigger vulnerabilities within the integrity of the system if such sources are compromised.

(4) Bettering resilience and effectivity of the fee system

Whereas further fee strategies with various design options will help assist the operational resilience of fee techniques, this profit is much less related to Hong Kong as native digital fee techniques are extremely resilient and environment friendly, with disruptions being very uncommon.

(5) Reinforcing the transmission of financial coverage

In principle, remunerated retail CBDC may reinforce the transmission of financial coverage to the true economic system. Retail CBDC may additionally chill out the efficient decrease sure on coverage charges and permit them to turn into extra adverse. These advantages are usually not very related in Hong Kong as:

  • remunerated e-HKD would differ from unremunerated bodily money, elevating public communication challenges concerning the equivalence of e-HKD with bodily money;
  • to strengthen financial coverage transmission, remunerated e-HKD have to be in widespread circulation with the intention to affect financial institution rates of interest, however doing so would result in a larger disintermediation of banks; and
  • within the state of affairs the place a adverse rate of interest coverage is warranted, the continued existence of bodily money would imply that the general public may nonetheless hoard money, which might undermine the effectiveness of direct financial coverage transmission by means of remunerated e-HKD.

Potential challenges of retail CBDC

  • Implications for financial institution funding and its penalties

Potential holders of e-HKD might have to change funds out of their deposit accounts for retail CBDC, which might have an effect on the stability sheets of economic banks and result in disintermediation of banks. Additional, as e-HKD could be a part of the Financial Base, the designated distribution banks could be required to submit USD to the HKMA for the correct to make e-HKD accessible to the general public amid the autumn in banks’ retail deposits. If the substitution from deposits to e-HKD is critical, this will result in disintermediation of banks.

  • Growing cyber safety and software program dangers

The retail CBDC system may very well be a lovely goal of cyber attackers. The e-HKD system would face dangers akin to distributed denial-of-service assaults. Other than the dangers arising from the fee system itself, there are additionally cyber dangers related to the adoption of good contracts.

  • Growing financial vulnerability to energy/community outages

Reliance on electrical energy and information community techniques would imply that financial actions could be disrupted throughout energy/community outages, albeit the low risk of such occasions.

Design concerns of e-HKD

  • Issuance mechanism of e-HKD
  1. Banks submitting USD in change for e-HKD (Cash strategy);
  2. Banks submitting USD in change for Certificates of Indebtedness (CIs) (Banknote strategy); or
  3. Banks changing present Combination Steadiness (AB) into e-HKD (AB strategy).
  • Interoperability with large-value and retail fee techniques

The design of e-HKD ought to keep away from making a closed-loop fee system which impedes funds made between e-HKD customers and customers of different fee techniques.

  • Privateness and information safety
  1. A key consideration is whether or not e-HKD must be token-based or account-based.
  2. The e-HKD system ought to always adjust to the Private Information (Privateness) Ordinance and related codes of apply, tips and finest practices issued by the Workplace of the Privateness Commissioner for Private Information on occasion.
  1. The authorized mandate and authorized tender standing of e-HKD could be anticipated to align with that of present Hong Kong foreign money within the type of foreign money notes and banknotes issued beneath the Authorized Tender Notes Subject Ordinance, and cash issued beneath the Coinage Ordinance.
  2. There’s a want for anti-money laundering/counter-financing of terrorism controls.
  3. It might appear logical that possession ought to cross upon “supply” – and the purpose of supply (within the absence of bodily possession) might fall to be decided by reference to the “ledger” know-how used to file the switch of e-HKD.
  4. Consideration must be given to any advantages of adopting prison regulation protections (a “digital equal” of present anti-counterfeiting provisions) to guard and bolster confidence within the e-HKD.

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