Hong Kong still weighing whether retail CBDC benefits outweigh the risks

A retail central bank digital currency (CBDC) could facilitate interoperability and interlinking between the various entities that make up Hong Kong’s digital economy. However, the city-state’s central bank is still weighing whether the benefits of issuing one outweigh the risks.

Hong Kong Monetary Authority (HKMA) chief executive Eddie Yue delivered a speech
recently on the city’s approach to innovations in digital payments, including CBDCs, stablecoins, and tokenized deposits.

Yue reiterated the HKMA’s support for innovation, noting that the bank was among the first to explore CBDCs with Project LionRock in 2017. This effort has evolved over the years into Project mBridge, a multi-nation cross-border CBDC effort with Thailand, the United Arab Emirates, and China’s central banks.

While it has evolved to focus on a wholesale CBDC, HKMA still believes in the potential of a retail digital dollar to “facilitate interoperability and interlinking between various entities participating in our future digital economy.”

However, a retail CBDC comes with its fair share of challenges and risks, Yue told the attendees, adding that the central bank is still weighing whether the benefits outweigh these risks.

“More research would also be required on how the introduction of a retail CBDC would impact the broader financial system,” said Yue.

The top bank also believes that the city-state’s digital payment systems are “generally efficient and competitive” and that a retail CBDC may not be as urgent as in other countries.

A wholesale CBDC, however, is critical to the HKMA’s vision of a digital future. Yue described it as the instrument that will underpin all different forms of digital money, from stablecoins to tokenized deposits and privately issued money.

In March, the bank launched Project Ensemble, which focuses on using the wholesale CBDC to settle interbank transactions.

Amid all the developments with digital money, Yue reiterated the HKMA’s pledge to remain responsive, open-minded, and prudent in its regulatory approach.

The HKMA’s positive stance on digital money, stablecoins, distributed ledger technology (DLT), and digital assets has spread to the city’s financial industry.

Recently, ZA Bank, the largest digital lender in Hong Kong, revealed it’s working with stablecoin issuers on new dedicated accounts for their cash reserves. HSBC (NASDAQ: HSBC) has also invested heavily in tokenization in the city, launching tokenized gold for retail investors last month.

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