Could a digital Hong Kong dollar undermine the local banking sector? HKMA must take note
- The HKMA’s feasibility study must think through the impact of options for e-HKD issuance: will commercial banks take on the role, as they do now for physical banknotes, or will the Monetary Authority issue the digital currency itself?
The HKMA, the city’s de facto central bank, “will have a conclusion in about 12 months”, Yue added. The central bank digital currency (CBDC) feasibility study was announced at the launch of fintech 2025, the HKMA’s wider fintech plan for Hong Kong for the next few years.
The challenge will be to craft an e-Hong Kong dollar (e-HKD) that will have popular appeal, tick the regulatory boxes but, crucially, won’t disrupt the business models of Hong Kong’s commercial banking sector.
Yue noted that “Hong Kong people, nowadays, are more willing to use digital banking services”, while HKMA deputy CEO Howard Lee stressed that “the e-Hong Kong dollar will just be an electronic version of a physical banknote”. This means the “mechanism of the issuance of e-Hong Kong dollars will be the same as the issuance of physical banknotes under the [Hong Kong currency’s US dollar] peg”, Lee said.
On the regulatory side, the HKMA is arguably well placed to make central bank digital currency design choices that reinforce an existing Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime that the International Monetary Fund only last week characterised as “solid”.
What remains unclear, when it comes to e-HKD issuance, is whether the HKMA will co-opt the existing system, where three commercial banks – HSBC, Standard Chartered and Bank of China (Hong Kong) – are authorised banknote issuers, or whether the Monetary Authority might issue the e-Hong Kong dollar itself.
Either route has its pros and cons. A Bank for International Settlements (BIS) working paper, published earlier this month, argued that “a CBDC should let central banks provide a universal means of payment for the digital era, while at the same time safeguarding consumer privacy and preserving the private sector’s primary role in retail payments and financial intermediation”.
Establishing e-HKD issuance along the same lines as Hong Kong’s existing system for banknotes would arguably meet many of the criteria referenced by the BIS working paper but significant questions would still need to be addressed about the level of information the three commercial banks would be expected to feed back to the HKMA, if only to reinforce the continuing solidity of the Monetary Authority’s own AML/CFT regime.
The HKMA might conclude that, for regulatory reasons, the existing system should not be used as the basis for e-HKD issuance, and so could instead choose to issue the e-HKD itself.
But that option is no panacea. Such a central bank digital currency might be a magnet for depositors, especially for funds currently held with commercial banks in Hong Kong that are in excess of the HKMA’s Deposit Protection Scheme.
“Household investments into a CBDC could substantially increase the balance sheet of central banks, and crowd out deposits at commercial banks,” the working paper argued. That could put pressure on the business models of commercial banks; since they finance loans with deposits, the paper noted, a central bank digital currency could negatively impact an economy.
This argument would surely be applicable to any e-HKD issued directly by the HKMA and be a key issue for it to consider.
Hong Kong may well prove to be fertile territory for a central bank digital currency but the HKMA has much to ponder as it crafts its e-Hong Kong dollar strategy.
Neal Kimberley is a commentator on macroeconomics and financial markets