Does Hong Kong need a CBDC?

Written by Kapronasia || June 19 2023

Ever since lifting its Covid controls, Hong Kong has been on a mission to burnish its financial center credentials that were damaged by its long closure to the world during the pandemic as well as the political turmoil that preceded it. One key part of the city’s strategy has been to embrace digital assets even as other jurisdictions like Singapore tread a more cautious path. While much media attention has focused on Hong Kong’s dance with crypto, the former British crown colony also seems determined to roll out a central bank digital currency (CBDC).

CBDCs for advanced economies – perhaps a solution in search of a problem? Hong Kong’s interest in a CBDC is a case in point. Almost everyone in Hong Kong has a bank account, while per-capita GDP is US$49,500, which is among the top 20 globally.

With that in mind, the use cases for a digital Hong Kong dollar thus far are somewhat esoteric. For instance, the city is experimenting with tokenized commercial bank deposits involving HSBC, Hang Seng Bank and Visa, with the credit card giant facilitating interoperability between banks. HSBC has said it would study the “viability, key design considerations and interoperability” of deposit tokens.

And what exactly is the reason for deposit tokens? Apparently, to enable banks to settle deposit payments with a CBDC. According to Ledger Insights, provided that HSBC issues tokens, Hang Seng Bank could keep them, or HSBC can settle up by paying Hang Seng Bank with CBDC and burning (deleting) the HSBC tokens.” Hmmm.

Are these deposit tokens significantly better than existing deposit options? They would have to be for the financial sector to invest in the infrastructure and training of personnel to enable their widespread use.

There are five other categories for CBDC applications in Hong Kong besides tokenized deposits: full-fledged payments, programmable payments, offline payments, settlement of Web3 transactions and settlement of tokenized assets.

If Hong Kong’s interest in an e-HKD is really about making sure the city can keep up with the mainland’s CBDC development – the most advanced in the world thus far – then it may be worth noting that the e-CNY has yet to catch on. In March the South China Morning Post reported that most shops in China rarely take payments in digital yuan. About 26 mainland cities are participating in the pilot. Data from the People's Bank of China found that only RMB 13.6 billion e-CNY US$2 billion) was in circulation in January. 

We reckon the reason for that is that China’s existing digital payment options are already very effective. Why use an e-CNY wallet when Alipay and WeChat Pay already work so well?

It is also worth noting that Hong Kong’s largest rival as an Asian financial center, Singapore, has been cautious about pursuing a retail CBDC. “MAS’ decision to proceed with further technological and policy explorations of a retail CBDC should not be taken as a commitment to its issuance,” the Monetary Authority of Singapore said in a policy paper about the subject.  

The paper noted that MAS is exploring alternatives to a retail CBDC, notably Singapore dollar-denominated stablecoins. If it proceeded with that option, the Singaporean central bank might permit issuers to back their tokens fully using central bank reserves.