Explainer: As Hong Kong explores how e-HKD can be used for shopping and dining in the city, here are some key facts on how digital currencies work

Asia's Tech News Daily

50-page white paper, digital banking services, any central banks, bridging their respective CBDCs, to securities and fund investments, “mBridge”, HKMA and the PBOC

The Hong Kong Monetary Authority (HKMA) is exploring a digital currency called e-HKD that will allow the public to use this form of electronic payment to shop, dine or make money transfers.

The authority first mentioned the plan in June as part of Fintech 2025, its fintech plan for the next four years. The de facto central bank earlier this month issued a 50-page white paper called “e-HKD: A technical perspective” as a first step to explore infrastructure for the currency.

After a period of more study, the HKMA should be in a position by mid-next year to decide if it will go ahead with the e-HKD plan, bringing Hong Kong a step closer to becoming a cashless city. Here is what you need to know about the digital currency:

What is e-HKD? Why does Hong Kong need to introduce it?

The e-HKD is a retail-focused digital currency equal to an electronic version of banknotes. The user will need a mobile wallet app to keep and use the currency for shopping, dining or transferring money.

Under one of the proposals, the central bank will issue the digital money at the wholesale level with banks, while the banks and other payment companies will distribute the e-HKD to retail customers.

The HKMA considers it is the right time to explore a digital currency as the city’s residents are now more willing to use digital banking services, after eight branchless virtual banks started operating in Hong Kong last year.

Many central banks worldwide have introduced, or are considering introducing, a digital currency. If Hong Kong does nothing, it may lag behind as a financial centre. The Bahamas in October last year launched a digital currency called Sand Dollar, while mainland China has rolled out pilots across 11 areas and cities for the e-CNY.

“If the e-HKD proves to be a credible alternative to cash then it could lead to a cashless society, marked by greater efficiency and lower costs thanks to faster settlement and a stronger ability to stop unlawful activities like money laundering, while further protecting monetary sovereignty,” said Benjamin Quinlan, CEO and managing partner of consulting firm Quinlan & Associates.

Is it safe for the general public to use e-HKD?

The e-HKD could be safer than cash as the identity of users can be traced, said Wilson Chan, senior adviser of the Hong Kong Institute of Bankers.

“When someone steals your wallet, you lose your banknotes and coins that have no ownership identity. However, if someone stole your e-HKD, it is easier for enforcement agencies to trace the digital currency,” said Chan.

However, the e-HKD could face cyberattack risks. Users may find it difficult to make payments if there is an electricity outage or if payment systems are down due to a technical glitch. Authorities will also need to ensure digital currency payment systems have robust anti-fraud standards.

“There remain several local retailers that are still hesitant to adopt online payment options for customers, potentially limiting e-HKD’s ability to reach the lowest rungs of society in particular,” said Quinlan.

How can the e-HKD protect the privacy of its users?

One way to protect user privacy proposed by the HKMA is for a user to transfer funds using randomly selected, anonymised public keys. This would help strip away any identifiable information about a person from a transaction.

For e-HKD transactions to stay anonymised, public and private keys are used, which are tools that help encrypt and decrypt data respectively. The sender and receiver must use a new public key for each payment.

Since the public key owner needs to go through his bank to initiate such anonymised payments, the bank will continue to keep track of the real identities of public key holders and therefore, keep track of its customers’ holdings of the e-HKD.

What does e-HKD have to do with other central banks?

The e-HKD is just the retail side of Hong Kong’s central bank digital currency (CBDC) use case. The HKMA has actually been working with the People’s Bank of China (PBOC), and the central banks of Thailand and the United Arab Emirates on ways of bridging their respective CBDCs for use in cross-border payments.

Such usage is aimed at easing fund transfers supporting the trading of goods between countries. And recently industry players have said that the use case for CBDCs could be expanded to securities and fund investments.

Called “mBridge”, the HKMA is currently building such a prototype for a multi-central bank digital currency platform with its three counterparts.

“mBridge” aside, the HKMA and the PBOC are also conducting separate tests looking at how to allow the digital yuan, which is China’s sovereign digital currency, to be used in Hong Kong.

Will the Hong Kong dollar peg to the US dollar be affected by e-HKD?

No. The HKMA in June clearly indicated the e-HKD will only be a digital format of the banknotes and coins in circulation. The peg, which links the Hong Kong dollar with the US dollar, would remain in place. The mechanism for issuance of e-Hong Kong dollars will be the same as for the issuance of physical banknotes under the peg.

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