Hong Kong shares roadmap for e‑HKD. Will explore CBDC for DeFi — Ledger Insights

Yes­ter­day the Hong Kong Mon­e­tary Author­i­ty (HKMA) shared its roadmap for devel­op­ing its retail cen­tral bank dig­i­tal cur­ren­cy (CBDC), the e‑HKD. This marks Hong Kong’s tran­si­tion from the research to the devel­op­ment phase of the CBDC.

The cen­tral bank believes it will take two to three years to devel­op the inter­bank lay­er for the two-tiered con­sumer-focused CBDC. How­ev­er, SCMP report­ed tri­als to start in the fourth quar­ter, which might refer to use case exper­i­ments ver­sus infra­struc­ture. Addi­tion­al­ly, the cen­tral bank stat­ed it would explore using CBDC as an on and off-ramp for DeFi.

A three-pronged plan

The cen­tral bank out­lined a three path approach to devel­op­ment. The first is the foun­da­tion­al infra­struc­ture, includ­ing the whole­sale lay­er, which the cen­tral bank will use to enable the dis­tri­b­u­tion of the retail CBDC with banks as inter­me­di­aries. HKMA expects to take nine months to design this and two to three years to devel­op it. There are also plans for a leg­isla­tive pro­gram to enable e‑HKD issuance.

Simul­ta­ne­ous­ly the cen­tral bank intends to explore retail use cas­es, some­thing which should be much faster but iter­a­tive. This might be where pilots could poten­tial­ly start as soon as the fourth quarter.

One of the use cas­es men­tioned is a tri­al of deliv­ery ver­sus pay­ment (DvP) set­tle­ment of tok­enized secu­ri­ties. At first, this looks more like a whole­sale rather than retail CBDC appli­ca­tion. How­ev­er, this week the gov­ern­ment made an issue of show­ing its sup­port for the secu­ri­ty token sec­tor, which also includes con­sumer-fac­ing appli­ca­tions in which investors can buy tokens with­out intermediaries.

Oth­er projects include a wal­let app, cyber­se­cu­ri­ty issues being explored with the Bank of Israel, pri­va­cy and per­for­mance fea­tures, and indus­try engage­ment on use cases.

The third path in its roadmap relates to the pro­duc­tion roll­out, which HKMA said is depen­dent on progress on the foun­da­tion­al and use case work as well as the inter­na­tion­al community.

CBDC for DeFi?

The paper accom­pa­ny­ing the announce­ment men­tioned explor­ing the e‑HKD for DeFi in cryp­tocur­ren­cy. It referred to “dis­cus­sion in the inter­na­tion­al finan­cial com­mu­ni­ty on the poten­tial appli­ca­tion of CBDC to the cryp­to and decen­tralised finance (DeFi) space to pro­vide an anchor of sta­bil­i­ty in the rel­e­vant mar­kets” giv­en it doesn’t con­sid­er sta­ble­coins appropriate.

In terms of Defi specifics, the action list includes “Study­ing the pros and cons of using CBDC as the on- and off-ramp instru­ment for DeFi.”

In con­text, the HKMA is also explor­ing DeFi appli­ca­tions to improve fund­ing for SMEs.

On a relat­ed note, last month, HKMA part­nered with InvestHK to add CBDC to the Hong Kong Glob­al Fast Trace 2022 pro­gram. It’s inter­est­ed in appli­ca­tions, includ­ing pro­gram­ma­ble mon­ey, inter­op­er­abil­i­ty, forex and liq­uid­i­ty management.

The bulk of the report is a sum­ma­ry of two e‑HKD con­sul­ta­tions, one tech­ni­cal and one on policy.

SCMP quot­ed HKMA Deputy CEO Howard Lee say­ing, “In our mar­ket con­sul­ta­tion, many com­men­ta­tors expressed wor­ries that Hong Kong needs to catch up with the inter­na­tion­al trend.” The paper also dis­cuss­es poten­tial inter­op­er­abil­i­ty with China’s eCNY CBDC.

Apart from its retail CBDC work, Hong Kong is also work­ing on two whole­sale CBDC projects, both of which it classed as devel­op­ment rather than research. One is the mBridge project, a mul­ti-CBDC ini­tia­tive for cross bor­der pay­ments with the cen­tral banks of Thai­land, Chi­na and the UAE. The oth­er is a tok­enized HKD for bond set­tle­ment. We’re guess­ing this is relat­ed to Hong Kong’s explo­ration of tok­enized green bonds.