The Hong Kong Monetary Authority (HKMA) has issued a circular on April 27th instructing authorized institutions, also known as “AIs,” to provide banking services to cryptocurrency firms while adopting a risk-based approach to Anti-Money Laundering (AML) measures. This circular comes as a significant move towards legitimizing cryptocurrencies in the region and bridging the gap between traditional banking and the rapidly growing digital assets industry.
The HKMA’s directive is part of its broader efforts to regulate the cryptocurrency market in Hong Kong, a region that has been grappling with the lack of clarity surrounding cryptocurrencies and their legal status. This directive requires authorized institutions to assess the risks associated with each corporate customer, including cryptocurrency firms, and implement appropriate measures to mitigate those risks.
This move is a critical step towards the integration of cryptocurrencies into the mainstream financial system in Hong Kong, where digital assets have long struggled to gain legitimacy. Cryptocurrency firms in Hong Kong have often faced significant challenges in accessing banking services, leading to operational difficulties, stifling innovation, and impeding growth. With this new directive, the HKMA aims to ensure that cryptocurrency firms can access necessary banking services, enabling them to operate efficiently and safely within the existing regulatory framework.
The HKMA has been actively working towards regulating the cryptocurrency market in the region, with plans to launch its own central bank digital currency (CBDC) in the coming years. The HKMA’s efforts to regulate the cryptocurrency market, coupled with its CBDC initiative, highlight the region’s increasing interest in the digital assets industry and its potential to transform the traditional financial system.
In conclusion, the HKMA’s directive to authorized institutions to provide banking services to cryptocurrency firms is a significant move towards legitimizing cryptocurrencies in Hong Kong. This directive will not only help bridge the gap between traditional banking and the digital assets industry but will also enable cryptocurrency firms to access necessary banking services, leading to operational efficiencies and growth. With the HKMA’s increasing interest in the digital assets industry, we can expect to see further developments in the coming years, ultimately leading to the integration of cryptocurrencies into the mainstream financial system.
A study shows that 90% of surveyed central banks worldwide are exploring the future issuance of central bank digital currencies (CBDCs). Blockchain.News interviewed industry experts to find out the outlook of Hong Kong’s digital currency and its potential adoption.
The outlook of e-HKD
In a recent discussion paper published by The Hong Kong Monetary Authority (HKMA), the local regulator reached out to the public to consult the development of retail central bank digital currency (rCBDC) or the digital Hong Kong Dollar (e-HKD). The discussion paper lists a wide range of issues and a dozen of key questions covering a wide range of issues:
The potential benefits and challenges of e-HKD
The balance between privacy and illicit activities prevention
Interoperability with the existing payment system
Considerations in terms of legal, design and policy perspectives respectively
The level of participation by the private sectors.
The role of e-HKD
The rCBDCs can be divided into two-tier distribution models: the wholesale interbank system and the retail user wallet system, according to the e-HKD technical whitepaper.
The wholesale CDBC is used for transfers between the central bank and commercial banks or other institutions, while the retail CDBC is used for transfers between commercial banks and the general public for retail transactions, Professor Chew Seen-Meng, Associate Professor of Practice in Finance and Associate Dean (External Engagement) of the Chinese University of Hong Kong (CUHK) explained.
Regarding retail CBDCs, a doubt that could arise among the public could be why does the market still need another digital payment tool among other diverse options in HK?
Chew, the former economist for the Singapore office of the International Monetary Fund (IMF) and Morgan Stanley, acknowledged that “it is true that there is no urgent need for a digital HKD.”
However, “having an e-HKD could make our lives even more convenient by eliminating the need to carry physical notes and coins around and enables virtually all payments to be made by just tapping the mobile phone” in the long term, Chew said.
Moreover, “the transmission mechanism of monetary policies from the HKMA can become more efficient through the e-HKD,” Chew added.
Furthermore, the scholar believes digital currency could provide a faster and more convenient way to transfer value by supporting more economic activities potentially if the digital currency is accepted as a medium of exchange by the public in the long term.
Currently, a plethora of payment platforms has already captured the market.
E-wallets with Peer-to-Peer (P2P) payment functions are becoming mainstream in Hong Kong.
In e-commerce alone, digital wallets are expected to account for 40 % of the city’s online transaction value by 2025, overtaking credit cards, according to the 2022 Global Payments Report by the US financial technology company FIS.
In an exclusive interview with Blockchain.News, Etelka Bogardi- Partner of Asia lead of Global Payments and Fintech Practice, Norton Rose Fulbright Hong Kong, told Blockchain.News that “one of the primary design considerations should be interoperability with existing systems.”
Bogardi, a Hong Kong-based financial services regulatory lawyer and the former Senior Counsel to the Hong Kong Monetary Authority, suggests the regulator should aware of the effect of the e-HKD on banks and any potential disintermediation effects, given Hong Kong’s status as an international financial centre and the large presence of the financial sector.
Meanwhile, Chew also shared a similar view and added that “the administration needs to fully ensure and secure before e-HKD is launched.”
“Unless e-HKD can address some pain points of the current e-Payment services or is much more convenient than the existing e-Payment options, it would be hard for e-HKD to be embraced by the public among the plethora of retail payment options in Hong Kong,” Etelka added.
Through the paper, the HKMA reiterates that “the purpose of developing e-HKD is not to replace existing payment methods” but to “avoid creating a closed-loop payment system, which impedes payments made between e-HKD users and users of other payment systems.”
The rCBDC is expected to provide connectivity among other payment service providers, for instance, cross-platform payments to be conducted efficiently.
Token-based or Account-based?
The balance between privacy protection and data access is another crucial consideration among systematic issues. The discussion paper mentioned that the key design feature of e-HKD to consider is whether it is issued token-based or account-based.
According to the paper, the token-based would allow more anonymity in payments between various parties, protecting against abuse of individual data by commercial entities. Still, it could be risky to facilitate illicit activities.
The account-based approach, on the other hand, would “require the recording of balances and transactions of rCBDC holders. This approach would rely on the ability to verify the identity of the account holder and could help comply with AML/CFT requirements.”
Both approaches require a ledger to complete transactions with distributed ledger technology (DLT) and tokenization, which could be structured to trace users depending on the degree of anonymity and access of information to parties.
However, Prof. Chew said that the traceability of digital currency from the regulator indicates that small retailers such as taxi drivers might be reluctant or not interested in changing their behaviours or habits of transactions due to taxation concerns.
“Since the e-HKD’s value will be controlled by the HKMA, it is already a kind of stablecoin. To the extent that the HKMA is able to maintain the stability of e-HKD’s value through algorithms or its forex reserves, the risk of the e-HKD plummeting in value should be quite small.”
The regulator said the “full anonymity is not plausible,” e-HKD should comply with existing law and ordinances. Its legal mandate and legal tender status would logically align with the currency system.
“Overall, whilst there would need to be some work done to accommodate an e-HKD in the existing legislative framework of currency issuance and related issues, these are not insurmountable obstacles. Some of the more technical legal issues raised relate to the application of effective AML controls and data privacy laws. In that sense, the discussion around having a two-tier issuance and distribution structure is very beneficial,” Etelka explained.
Global adoption of CDBCs
Over the past two years, the global market was trapped by uncertainties amid the COVID-19 pandemic.
Amid the turmoil, the increasing demand for raising cross-border payments efficiency and the emergence of cryptocurrencies, such as stablecoins and other tokens, also gave rise to regulatory challenges, pushing global governments to update their currency policy in response.
According to the latest report published by the Bank of International Settlement (BIS), 90% of surveyed central banks worldwide are exploring the issuance of central bank digital currencies. The financial institution added that around two-thirds of central banks surveyed would take issuing retail CBDC into account in the near future.
The Bahamas became the first sovereign nation to issue CBDC since 2020, called the “Sand Dollar”, as the pioneer in adopting a new form of currency, driven by its geographical and the cost of delivering currency on its land.
“In countries with a weak currency or underdeveloped financial system, and a large unbanked population, the CBDC is more useful and can be more easily adopted by its citizens,” Chew explained.
Yet, the SAND Dollar’s potential benefits did not live up to its expectation.
A report from the IMF indicates that the island nation’s adoption of the SAND Dollar is merely less than 0.1% of the currency in circulation.
The issue of financial inclusion continuously troubles this Caribbean nation. World Bank defines financial inclusion as the access of individuals and businesses to valuable and affordable financial products and services for their financial that need to be delivered responsibly and sustainably. The Bahamas is also desperately to improve its cybersecurity for its digital currency.
Bogardi believes Hong Kong’s market enjoys a unique position with a well-developed retail payment landscape:
“Issues of financial inclusion are perhaps not as relevant as other jurisdictions who have chosen to press ahead with CBDCs (e.g. Bahamian Sand dollar). As a result, it is correct that the focus of the HKMA’s exploration of the e-HKD is as a conduit to fuel digital innovation in Hong Kong, and to help position it for potential challenges from new forms of payment means such as stablecoins.”
Regionally, China has been conducting a wide range of digital Yuan (e-CNY) pilot tests since 2020, developed by the People’s Bank of China (PBoC).
The administration rolled out a massive pilot test during its Beijing Winter Olympic Games and currently, the e-CNY app is one of the most downloaded apps in the country. The app has recorded over 83 million downloads through iOS and Android systems so far.
“In China, electronic payments have been dominated by Alipay and WeChat Pay for several years now. The central government is keen to introduce the e-CNY to maintain control of the monetary system before private firms like Alibaba and Tencent become too influential in the country’s payment system. Since it is a large country, it has to do many pilot tests in numerous cities so that citizens can familiarize themselves with the e-CNY before it is officially launched, and this of course will take some time, “Chew said.
On the other hand, experts suggest geopolitical factors, such as war, might also accelerate the progress of CBDC issuance.
While the objective of introducing the CBDC among other countries or regions could be different, the HKMA has disclosed that “it is inclined towards the Coins-approach under which e-HKD would be solely issued by one single authority” in the long term.
By adding that, looking for tasking agent banks to handle all customer-facing activities relating to the distribution of e-HKD.
“If the technology is ready, the HKMA can consider doing some pilot tests in several stages to let Hong Kongers try out the e-HKD on their mobile phones so that they can familiarize themselves with it and learn about its usefulness,” said Prof. Chew.
The HKMA has reiterated that it has not yet decided on introducing the e-HKD.
In order to make its stance known about stablecoins, the Hong Kong Monetary Authority (HKMA) has published a discussion paper in which it is soliciting the public’s contributions to its proposed regulatory approach to digital currencies and stablecoins in particular.
Per the published paper, the HKMA acknowledged the steady growth in the market capitalization of stablecoins which is pegged close to $150 billion, up significantly from less than $20 billion back in January 2020.
The growth of stablecoins has been seen by many regulators as a source of potential threat to financial stability, and some especially China has moved to ban all related digital assets. The request for comments by the HKMA is hinged on 8 salient questions that can eventually drive one of 5 outcomes, including “no action”, “opt-in regime”, “risk-based regime”, “catch-all regime”, and “blanket ban”.
Each of these outcomes has its features and potential downsides. The no-action call for instance can fuel the sustenance of the status quo with the inherent risks growing and eventually affecting the broader financial ecosystem. The risk-based regime will see comprehensive regulatory coverage to address risks in a broader sense. The downside to this regime will be the regulatory and supervisory costs with a number of risks still existent.
Source: HKMA
The advent of stablecoins – digital currencies that have no volatility – has changed many narratives in the $2 trillion cryptocurrency industry. These tokens, the most common of which is Tether (USDT), USDC, and BUSD, are now being used as the fiat in the crypto trading world, as a lending asset in decentralized finance (DeFi), a use case that has stirred the influx of both retail and institutional investors into the space.
Despite this growth, the discussion paper noted that;
“The growing exposure of institutional investors to such assets as an alternative to or to complement traditional asset classes for trading, lending and borrowing […] indicate growing interconnectedness with the mainstream financial system.”
Joining other nations, including the U.S. in pushing for a stablecoin regulation, the HKMA plans to bring the regulations to life by 2023/24, the HKMA is giving the public up to March 31st this year to submit their responses.
The Hong Kong Monetary Authority (HKMA) has published a Technical Whitepaper to discuss the possibility of the digital Hong Kong Dollars (e-HKD) issue as part of its efforts to come up with an initial view regarding the prospects of its proposed Central Bank Digital Currency (CBDC) by the middle of next year.
The Whitepaper is part of the central bank institution’s projected “Fintech 2025” strategy, highlighting one strategic direction to strengthen research work on CBDC with a view to future-proofing Hong Kong in terms of CBDC readiness.
According to the HKMA, the Whitepaper explores potential technical design options for issuing and distributing retail CBDCs. The apex bank noted that the Whitepaper will be the first of a slew of other papers that are on track to be released to showcase a “technical architecture that includes a groundbreaking privacy preservation arrangement that allows transaction traceability in a privacy-amicable manner.”
Eddie Yue, Chief Executive of the HKMA, said:
“The Whitepaper marks the first step of our technical exploration for the e-HKD. The knowledge gained from this research, together with the experience we acquired from other CBDC projects, would help inform further consideration and deliberation on the technical design of the e-HKD. We also look forward to receiving feedback and suggestions from academia and industry to enrich our perspectives,”
No timelines were defined yet as to when the e-HKD will be launched, as the HKMA noted that further legal and policy frameworks will have to be designed to back any affirmative decision to launch the CBDC.
The race to launch a CBDC has become one of the primary targets for a number of Central Banks around the world nowadays. While the People’s Bank of China (PBoC) is pioneering the retail trials of its Digital Renminbi (e-CNY) amongst the largest economies, American lawmakers are notably demanding a timeline on the Federal Reserve’s planned release of its consultative paper on a potential Digital Dollar.
With the CBDC race intensifying, the PBoC’s assertions that digital fiat currency becoming a “new battlefield” amongst sovereign countries coming to fruition is now more likely than ever.
The Hong Kong Monetary Authority (HKMA) has outlined its new technological development roadmap dubbed the ‘Fintech 2025’. It aims to develop Fintech and digital currency, Hong Kong’s version of Central Bank digital currency (e-HKD).
Per the published report, the apex monetary authority seeks to drive the financial sector to adopt technology in its entirety by 2025 ultimately. The areas it looks to overhaul, Central Bank Digital Currency (CBDC) pursuit or e-HKD, are vital aspects. Other strategic sectors include planning for all banks to go Fintech, creating a futuristic data infrastructure, growing the tech-savvy workforce and the rollout of funding, and the right policies to aid growth.
Hong Kong is one of the Asian cities that have already researching to develop a government-backed digital currency. Per the Fintech strategy, the HKMA said it would “strengthen its research work to increase Hong Kong’s readiness in issuing CBDCs at both wholesale and retail levels.”
The development of the Digital Hong Kong Dollar has been progressing with collaborations from the Bank for International Settlements (BIS) and the People’s Bank of China (PBoC). The apex bank also has a functional pact with the Bank of Thailand per the CBDC development. These collaborations, the HKMA says it will continue to cooperate.
“In addition to the continued effort on wholesale CBDCs, the HKMA has been working with the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre to research retail CBDCs and will begin a study on e-HKD to understand its use cases, benefits, and related risks,” the HKMA said in the statement, adding “The HKMA will also continue to collaborate with the People’s Bank of China in supporting the technical testing of e-CNY in Hong Kong to provide a convenient means of cross-boundary payments for both domestic and mainland residents.”
Many countries are making advances in positioning their fiat currency in readiness to absorb CBDCs. The United States of America, China, Sweden, and the United Kingdom are the latest names with active digital fiat currency developments. At the same time, these countries take a multi-year route to debut their cryptocurrencies competitors. Meanwhile, El Salvador has become the first country to adopt Bitcoin (BTC) as its official legal tender.
