HKMA studying risks and benefits of having own digital currency

November 07, 2019 16:38
Edmond Lau (left), HKMA senior executive director of the HKMA, said a central bank digital currency could shape the future of cross-border payments. Photo: HKMA

During an event marking Hong Kong FinTech Week on Wednesday, the Hong Kong Monetary Authority revealed that it has been conducting a research project to study the application of a central bank digital currency (CBDC) and will release a report probably by the first quarter of next year.

The HKMA has also signed a blockchain collaboration with a subsidiary of the Institute of Digital Currency of the People’s Bank of China, which is on the brink of launching a digital version of the renminbi, the national currency.

Central banks around the world are stepping up efforts to launch their own digital currency, spurred by Facebook’s ambitious plan to launch its own cryptocurrency called Libra and China's own efforts to launch its own global digital currency.

Researchers at the PBoC have reportedly been working on the currency for five years, exploring the possibility of issuing a digital fiat currency as an alternative to cash. 

At the fintech event, Edmond Lau, a senior executive director at the HKMA, revealed details of  Project LionRock, a low-profile project initiated by the city's de facto central bank back in 2017 to study the benefits and risks of launching its own CBDC.

Project LionRock is being carried out in collaboration with the three note-issuing banks, Hong Kong Interbank Clearing Ltd., and the R3 consortium, an enterprise blockchain tech firm focusing on collaborations among banks to devise blockchain use cases and applications.

The project is exploring a two-tier issuance model to allow corporates to hold and use CBDC tokens as sponsored participants of their banks.

According to Lau, the scope of Project LionRock includes a proof-of-concept study on token-based CBDC, debt securities issued under a single distributed ledger technology (DLT) system, overall CBDC evaluation as a payment system, as well as a potential service extension to new participants.

Lau said HKMA’s efforts at launching a CBDC is focused on the institutional side, particularly its use in domestic interbank payments, corporate payments at the wholesale level, and delivery-versus-payment of debt securities settlement.

He said, however, the HKMA does not see the need to issue the digital currency to individual users, citing the mass availability of mobile payment services for retail users in Hong Kong.

The HKMA also signed a memorandum of understanding (MoU) with the Bank of Thailand in May this year. The two authorities are conducting a joint research project named Project LionRock-Inthanon to study the application of CBDC to cross-border payments, with a view to facilitating payment-versus-payment (PvP) among banks in Hong Kong and Thailand.

The Bank of Thailand has been pursuing its own Project Inthanon with the goal to develop and test a proof-of-concept for domestic wholesale fund transfer using wholesale CBDC based on DLT.

Eddie Yue, the HKMA chief executive, said the digital currency to be issued by the monetary authority is designed to be used in settling cross-border payments between Hong Kong and other countries.

This will reduce the settlement layers involved, and thereby lower the cost and time needed for cross-border transfers. If it materializes, the digital currency will be available for corporates, not just banks, and may even be used for individual usage.

A joint report on the research is scheduled to be released in the first quarter of 2020.

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