New CBDC Pilot Goes Into Second Phase in Hong Kong As Government Explores Tokenization and Programmability

The Hong Kong Monetary Authority (HKMA) is entering the second phase of its e-HKD (e-Hong Kong dollar) pilot program, testing use cases for a possible central bank digital currency (CBDC).

In a new report issued by the HKMA, the central bank says the first phase of the effort had 16 different firms exploring several areas of CBDC use.

“Phase one took deep dives into potential domestic and retail use cases in six categories: full-fledged payments, programmable payments, offline payments, tokenized deposits, settlement of web3 transactions, and settlement of tokenized assets. Sixteen firms from financial, payment and technology sectors were selected to participate.”

One phase one participant, payments giant Mastercard, explored “wrapping” e-HKD for use across other blockchains by “simulating the purchase of physical items and the contingent exchange of NFTs (non-fungible tokens) – each representing a digital certificate of authenticity for the physical item – on a tokenized asset network.”

The report notes several worries related to CBDCs, including privacy concerns expressed by those surveyed leading up to the phase one launch in November 2022.

“Respondents were generally receptive to an e-HKD, although they highlighted the need to study the commercial viability of use cases and other issues such as privacy protections and legal considerations.”

The report also flags security concerns regarding programmable retail CBDCs (rCBDCs), which consumers would use.

Says the report,

“An rCBDC issued as programmable money may be more susceptible to cybersecurity risks, as it may present more mediums for external threats to inject malicious code. A delicate balance will therefore need to be struck between facilitating the industry’s development of innovative products and services, and ensuring the overall safety of monetary and financial systems.”

The second phase of the pilot will “build on the success of phase one, and consider exploring new use cases for an e-HKD” and “delve deeper into select pilots from phase one.”

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