Central Bank Digital Currency (CBDC) has emerged around the globe, as one of the key themes in financial technology development which could profoundly change how central banks manage both liquidity and physical cash.
China is set to become the first country to develop its national digital currency, or “digital currency/electronic payment” (DCEP), with pilot schemes being carried out in multiple cities including Shenzhen, Chengdu, Suzhou, and the Xiong’an New Area this year.
While China started its CBDC research in 2014, Hong Kong’s de facto central bank, the Hong Kong Monetary Authority, in fact, conducted a CBDC study, namely “Project LionRock”, back in 2017.
Two years later, the HKMA built a proof-of-concept with the Bank of Thailand (BOT), to explore the prospect of a wholesale CBDC, with enterprise software firm R3 as the technology partner.
Amit Ghosh, R3’s Head of Asia-Pacific region, sat down with EJ Insight, to discuss the potential of a “digital HKD” to be launched in the city.
HKMA’s Digital Currency Project
“As far as I know, I don’t think they are taking that step yet,” said Ghosh, on the prospect of a digital currency issued by the HKMA to Hong Kong’s citizens.
“The project we work with the HKMA and BOT is a cross-border [CBDC] project, Inthanon-LionRock, involves financial institutions from Thailand and Hong Kong side, such as HSBC and ZA Bank”, leveraging distributed ledger technology (DLT) to increase efficiency in cross-border payments, said Ghosh.
Powering cryptocurrencies like bitcoin, blockchain technology, DLT has been expected to offer a more efficient technology alternative against the traditional remittance, or cross-border payment services, which are costly and time-consuming.
According to the report released by the HKMA, the project seeks to build a proof-of-concept where a Thai baht-Hong Kong dollar cross-border corridor network is set up, as a bridge between the DLT-based local payment network of each jurisdiction, the Inthanon and the LionRock networks.
Built on Corda, R3’s DLT platform, the corridor network is designed to allow Inthanon and LionRock networks’ participants, mainly banks, to conduct funds transfers and foreign exchange transactions on a peer-to-peer basis. And CBDC could potentially eliminate the need to go through layers of correspondent banks and enable real-time cross-border transactions, according to the HKMA.
Completed in December 2019, the study shows the potential benefits of the CBDC in settlement efficiency, liquidity management efficiency, and regulation compliance. The two authorities also agreed to proceed with further joint research work in CBDC-relevant areas, including exploring business cases and connections to other platforms.
However, the HKMA mainly directs its focus on CBDC in the wholesale payment network model, rather than the retail payment scenario, of which China’s digital currency has been focused on.
Based on its CBDC study Project LionRock in 2017, the HKMA concluded the prospect of issuing CBDC for retail payment purposes is “limited” in view of the efficient payment infrastructure and services available in Hong Kong.
In the design of Hong Kong’s CBDC prototype, only banks, non-bank financial institutions, and large corporates, can have access to the digital currency.
In contrast, China’s digital yuan will be issued first by the central bank, PBoC, to local commercial banks, and then to retail users for circulation.
Last month, screenshots circulated in China’s social networks of a “digital yuan” interface being piloted at the Agricultural Bank of China (ABC), one of the four state-owned banks.
Tipping point of Blockchain
“China is clearly the country we see as one of the most active participants in the blockchain industry,” said Ghosh, “they have experimented and tested the technology quite heavily… while [launching CBDC] usually takes time, China has built the foundation intensely for the last three years.”
Partnering with central banks on CBDC studies and proof-of-concepts is one of the business focuses of R3. Founded in 2014, the enterprise blockchain software firm works with institutions across multiple industries from both the private and public sectors, to develop blockchain applications on Corda, its open-source blockchain platform.
Blockchain promises to disrupt many industries, from payments, banking, healthcare, real estate, to charities, with its capability designed to eliminate the need for the middleman.
However, Ghosh said there is not enough in-depth understanding of the technology, which had its first real-world application, bitcoin, launched in 2009. “There was a lot of hype initially in 2015… more unrealistic promises made, which led to some skeptics.”
As traditional institutions and central banks rush to embrace the blockchain and cryptocurrency revolution, Ghosh believes in 2020, many companies are now at a point they know how to use the technology. “This journey is probably similar to any new technology, like cloud computing,” he said, “you can imagine 15 years back, people didn’t believe in [cloud] and didn’t understand it. And then they saw the power… So we are going through the similar evolution of blockchain.”