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HKMA seeks answers to central bank digital currency questions

5th Oct 2021 by Graham Buck

The Hong Kong Monetary Authority (HKMA) has struck a cautious note on the topic of central bank digital currencies (CBDCs), outlining seven issues that need to be addressed ahead of any introduction of a digital Hong Kong dollar (e-HKD).

In a technical perspective paper, the HKMA considers "potential architectures and design options that could be applied to the construction of the infrastructure for distributing e-HKD". The Authority stresses that the paper should not be regarded as an endorsement of CBDCs, but aims to initiate conversation about how one could be implemented.

Areas that Hong Kong's central bank is keen to address include how cross-ledger synchronisation among participants in a CBDC should operate, how to prevent an oversupply of e-HKDs, ensuring privacy, and allowing both wholesale and retail uses of a digital dollar.

Seven pain points

The HKMA indicates that it does not oppose the concept by consideriing four options for distribution models and two viable designs. At the same time, it suggests that each of the following issues would need to be addresses before an e-HKD could be launched:

  • Privacy to provide user anonymity and also to allow any manipulation to be detected;
  • Interoperability between existing financial market structures and emerging fintech systems that use different cryptocurrencies or blockchains;
  • Performance and scalability as potential security overheads could make CBDCs less useful, and also due to the need to handle large numbers of users;
  • Cybersecurity – Defining attack vectors and standards to repel attacks, to ensure resilience and transaction security;
  • Compliance so that a CBDC doesn't hinder measures designed to curb money laundering, or circumvent laws against financing terrorism;
  • Operational robustness and resilience – The system should be able to cope sudden spikes in demand for digital currencies, and connectivity should have accompanying failsafes;
  • Technology-enabled functional capabilities – Do CBDCs improve existing business? What features are needed to deliver benefits current payment mechanisms do not?

"Academia and industry are invited to comment on the proposed architecture by making reference to the seven problem statements," the paper concludes. "It is believed that input to these problem statements has a great potential to lead to optimised designs of CBDC. New ideas and project proposals are also solicited."

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