Hong Kong continues to assert its prominence on the global financial stage, with the Hong Kong Monetary Authority (HKMA) spearheading groundbreaking collaborative initiatives in the realm of central bank digital currencies (CBDCs). In an event held on September 12 in Tel Aviv, the HKMA, in partnership with the Bank of Israel (BOI) and the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre, unveiled a joint report entitled “Project Sela – An accessible and secure retail CBDC ecosystem.” This landmark endeavor represents the inaugural collaborative project between the HKMA and the BOI in the fintech domain.
The Project Sela, as elucidated in the HKMA’s official statement, demonstrates the technical feasibility of a retail CBDC architecture designed to invigorate competition and innovation in digital payment systems. Notably, it enables nonbank payment intermediaries to establish direct connections with the central bank’s CBDC ledger. Leveraging distributed ledger technology, a proof-of-concept prototype was meticulously crafted to showcase the technical realization of the proposed architecture, incorporating rigorous cybersecurity measures and adherence to legal and policy requirements.
Howard Lee, Deputy Chief Executive of the HKMA, affirmed the value of Project Sela in providing practical insights into the cybersecurity, technical, and policy aspects of a retail CBDC implementation. While the HKMA has yet to make a definitive decision on the introduction of an electronic Hong Kong dollar (e-HKD) in Hong Kong, the findings from Project Sela will profoundly inform their ongoing exploration. The HKMA aspires that Project Sela will serve as a valuable resource for other central banks as they evaluate various retail CBDC architectures.
The e-HKD, a form of CBDC, is hailed as the harbinger of the future of payments and money. Hong Kong, once more, emerges as a trailblazer in this transformative landscape.
A CBDC represents a new form of central bank money accessible to the public, acknowledged as legal tender and a secure store of value for citizens, businesses, and government agencies. The motivations behind CBDCs are multifaceted, ranging from the replacement of physical currency notes to enhancing financial stability as a monetary policy tool, fostering financial inclusion, combating financial crime, augmenting payment efficiency, and mitigating intermediary risks.
However, it is paramount to acknowledge that the introduction of CBDCs, while promising a spectrum of efficiency gains and novel functionalities, does not singularly resolve all payment-related issues, notably in cross-border transactions.
Project Sela stands as one of several CBDC initiatives with which the HKMA has been actively involved in recent years, including the exploration of the digital yuan within the special administrative region and projects such as mBridge and the e-HKD.
The HKMA’s journey into the realm of CBDCs commenced in 2017 under Project Inthanon-LionRock (where Project LionRock involved collaboration with the Bank of Thailand). Subsequently, the initiative transformed into mBridge, evolving into a collective effort involving the People’s Bank of China (PBOC), the HKMA, the Bank of Thailand, the Central Bank of the United Arab Emirates, and the BIS Innovation Hub Hong Kong Centre. This project has garnered significant attention as a pioneering experiment utilizing blockchain technology for international payment settlements.
Furthermore, the HKMA has been diligently working on the development of its very own CBDC, the e-HKD.
Relatedly, Eddie Yue Wai-man, Chief Executive of the HKMA, marked the commencement of the e-HKD pilot program on May 18. Sixteen financial institutions were selected to test the digital currency across various applications, encompassing online payments, in-store transactions, government disbursements, tokenized deposits, tokenized asset settlement, and Web3 trading and clearing. This initiative, a cornerstone of Rail 2 in the HKMA’s three-rail approach, paves the way for the potential implementation of a retail CBDC, specifically the e-HKD, in the future.
The e-HKD is envisioned as a digital rendition of a physical banknote, issued through the existing currency peg system without impacting the monetary base or the enduring Hong Kong dollar peg to the US dollar.
This development aligns with the Fintech 2025 strategy introduced by the HKMA in June 2021. The strategy’s second pillar focuses on enhancing research efforts to bolster Hong Kong’s preparedness for issuing CBDCs at both wholesale and retail levels. Fintech 2025 is in harmony with Hong Kong’s role as a global fintech and trading hub, underscoring the region’s ongoing pursuit of economic initiatives aligned with the development blueprint for the Guangdong-Hong Kong-Macao Greater Bay Area.
In essence, Fintech 2025 mirrors the objectives of the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, recognizing Hong Kong’s economic significance on a national scale.
Hong Kong’s endeavors in the field of CBDCs are not isolated, as the fintech landscape in mainland China is advancing rapidly. Given Hong Kong’s status as a pivotal global financial center and its burgeoning fintech industry, it is well-positioned to play a crucial role in China’s fintech sector, leveraging its involvement in the Greater Bay Area blueprint.
In conclusion, Hong Kong is not only poised to enhance its status as one of the world’s foremost financial centers through its active participation in the digital yuan’s evolution but is also exploring the potential of the e-HKD. This underscores the HKMA’s and Hong Kong’s vanguard position in the race to shape the future of CBDCs, presenting a unique opportunity for both financial innovation and regional development.
