Central Bank Digital Currency: Is Hong Kong Ready for the Shift?
Authors: Kenny Shui, Assistant Research Director, and Judy Chen, Researcher at Our Hong Kong Foundation
“Non-fungible token” (NFT) has become a buzzword lately. As a digital product, NFT has found its way into arts, music, sports, gaming, collectibles and more. With its rising popularity, everything can potentially become a digital asset.
In a way, the NFT boom represents the future of finance – digital finance. Combined with emerging technologies such as blockchain, digitalisation will create a new financial ecosystem that is more efficient, cost-effective and transparent. China’s 14th Five-Year Plan also proposes to build a digital economy and accelerate the digital transformation of financial institutions. Digital finance will no doubt play a key role in driving the new economy. Currently, major countries around the world are racing to develop the infrastructure of digital finance – Central Bank Digital Currency (CBDC).
CBDC is a legal tender in the digital form issued by a central bank. In a digitalised financial system, CBDC will function like the traditional central bank currency in the current system. Its efficient circulation will drive the development of the entire financial industry.
According to a recent survey by the Bank for International Settlements, 80% of the world’s central banks are currently investigating CBDC, and 10% of them have plans to issue CBDCs in one to three years. CBDCs have gained popularity around the globe in a short time, with extensive research and testing in full swing. In Mainland China, the e-CNY pilot programme is a pioneer in the world, now expanded to cover ten cities including Shanghai. Even central banks in the US and EU, once apprehensive and hesitant about CBDC, have changed tack. A few months ago, Jerome Powell, the Chairman of the US Federal Reserve, even described digital US dollar as a “high priority project” for the Fed.
So what are the central banks doing to prepare for a CBDC?
In September last year, the European Commission adopted the Digital Finance Package, which includes a Digital Finance Strategy, a Retail Payments Strategy and legislative proposals on crypto-assets, blockchain and cybersecurity. The European Commission will work closely with the European Central Bank (ECB) to lay the groundwork for a digital euro, encompassing all areas including technology, legislation, public consultation and public-private partnerships. The ECB has already published the results of the first public consultation on the digital euro.
The UK is not far behind. Last month, the Bank of England announced the joint creation of a special task force with the HM Treasury to provide strategic guidance and departmental coordination for research into the “Britcoin”. Meanwhile, in March this year, the Bank of Japan established a Liaison and Coordination Committee which specialises in the development of a digital yen. In April, the Bank of Japan launched Phase 1 of its CBDC Proof of Concepts.
In addition to making technical advances, many central banks have also designed and implemented systematic strategies and plans for launching the CBDC. China’s 14th Five-Year Plan highlights the need to facilitate research and development of digital currency. It also supports Hong Kong in maintaining its status as an international financial center and a global offshore Renminbi business hub.
Hong Kong has invested in its own CBDC research and development efforts. As a financial hub closely connected to Mainland China which is continuously promoting the e-CNY, Hong Kong should seize the opportunities and make systematic preparations for the advent of the CBDC. Capitalising on this and implementing the 14th Five-Year Plan, Hong Kong has an exciting prospect of transforming from a traditional financial center into a digital one in the new era.