What is Hong Kong’s e-HKD?

With the advance of blockchain technology, the concept of a central bank digital currency (CBDC) has risen to prominence in recent years, spurring discussions and research globally. 

What is the e-HKD?

The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, has been exploring the idea of a digital Hong Kong dollar since as early as 2017. Hong Kong officially entered the CBDC race in 2021 by announcing the research for the e-HKD, essentially the digital form of the Hong Kong dollar. 

While the HKMA is exploring the technicalities and commercial viability of launching the CBDC on both retail and wholesale levels, the e-HKD project seems to place greater emphasis on issuing a retail digital currency for the general public and businesses.

Hong Kong’s de-facto central bank has not decided if or when it is going to introduce e-HKD to the public but stated that it will remain “open-minded” and continue to follow international CBDC developments.

In developing the e-HKD, HKMA has adopted a three-rail approach, where the first rail focuses on foundational layer development and the second rail on pilot programs. These are expected to converge into the third rail, which entails the actual launch of the e-HKD. 

What progress has Hong Kong made so far?

“Given the plethora of convenient retail payment options in Hong Kong, an e-HKD would need to add unique value to the current payment ecosystem,” the HKMA said in a statement, detailing the pilot programs for the digital currency project.

The HKMA launched the e-HKD’s pilot program in November 2022 as a joint effort with local industry members. The first phase included participants such as Alipay, Visa, Bank of China, Standard Chartered and HSBC. The participants were allowed to design their own hypothetical versions of e-HKD for the pilot.

The first phase, which wrapped up in October 2023, explored six case study topics — fully fledged payments, programmable payments, offline payments, tokenized deposits, settlement instructions for Web3 and settlement of tokenized assets.

The pilot program’s second phase started in March 2024, after successfully completing the first stage. The second phase, expected to last until mid-2025, intends to delve deeper into the results from the first phase, focusing on areas including programmability, tokenization and atomic settlement, which it explains as simultaneous exchange of money and assets.

The second phase will also explore a sandbox program for pilot participants to develop wholesale CBDCs, HKMA said.

What impact will it have?

Global consulting firm Boston Consulting Group (BCG) said in a report that adopting new payment systems, including retail e-HKD and stablecoins, has the potential to add HK$160 billion ($20.4 billion) worth of GDP, or an additional 0.5% GDP growth per year, for Hong Kong by 2032.

BCG explained that adopting the e-HKD would benefit the local users by offering more competitive financing rates, more flexible access to financing and faster loan disbursements via smart contracts.

However, for those benefits to be realized, the Hong Kong government will need to ensure a high level of security and privacy protection, guided by a clear regulatory framework around the e-HKD, BCG added.

Crypto developments in Hong Kong

In recent years, Hong Kong has endeavored to reclaim its position as Asia’s crypto hub. In June 2023, the region officially started its crypto licensing regime for virtual asset trading platforms, allowing licensed exchanges to offer retail trading services.

In December 2023, the HKMA and the Financial Services and the Treasury Bureau jointly launched a consultation and proposed a requirement for all fiat-pegged stablecoin issuers to obtain a license from the HKMA. Following that, the HKMA launched a sandbox program in March 2024 for stablecoin issuers to facilitate discussion on the proposal.