May 21, 2024

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Business is my step

HK must leverage CBDC to achieve electronic finance management – Viewpoint

5 min read
The booth of the Electronic Currency Institute of the Folks”s Financial institution of China at an expo in Beijing. [Photo provided to CHINA DAILY]

As the attractiveness of electronic payment on the mainland carries on to soar, Beijing is also having the digitization of authorized tender (or central lender issued forex) severely. On the 40th anniversary of the institution of Shenzhen as a Particular Economic Zone, President Xi Jinping introduced his support for the inside pilot testing of digital renminbi, or e-CNY. He also urged more study, improvement and application of e-CNY, as properly as international cooperation.

By mid-2020, the People’s Financial institution of China had revealed that pilot screening of e-CNY is ongoing in Shenzhen, Suzhou, Chengdu and Xiongan New Spot. China is now actively playing a main purpose in the improvement of Central Financial institution Digital Forex, or CBDC, even though many nations around the world about the world have also revealed expanding fascination in it. For case in point, Sweden is also executing a test run on CBDC, whilst research efforts are remaining created in the United States, the European Union and Japan.

How is CBDC distinct from other electronic income or e-wallets? In terms of the issuer, electronic forex can be issued by possibly central banking institutions or the personal sector. A CBDC is lawful tender in digital sort issued by a central bank. In distinction, cryptocurrencies or stablecoins these as Bitcoin and Libra are issued by the non-public sector and are not identified by central banks. Their volatility has also forged doubts on their reliability as currencies. Contrary to currencies stored in digital wallets these kinds of as AliPay and WeChat Pay, which are backed by personal companies, a CBDC is guaranteed by a central bank, hence carries nearly no credit rating threat. Also, recent e-wallets only work when there is an online link, although a CBDC has the purpose of offline payment, generating it probable to procedure transactions with no world-wide-web. A CBDC is ordinarily integrated with blockchain know-how, which enables anonymity for modest transactions. It can also monitor wherever the funds is likely, which helps with anti-money laundering and counter-financing of terrorism.

In accordance to a survey executed by the Financial institution of International Settlements in 2019, 80 percent of central financial institutions are looking into CBDC, indicating a expanding development as opposed to two several years ago. Over the earlier 12 months or so, the Federal Reserve of the US has improved its stance on CBDC from “not actively considering” to its current stance of “conducting research and experimentation”. Interestingly, the European Central Lender has been through very similar adjust in mind-set. It is crystal clear that the concept of CBDC is staying taken severely across the globe. Even while no nation or location has officially issued CBDC still, a lot of are proactively investigating and tests, such as the Hong Kong Financial Authority (HKMA). The HKMA experienced conducted a CBDC study task called “Project Lionrock” as early as 2017. Previous 12 months, the HKMA teamed up with Thailand’s central bank for “Project Inthanon-Lionrock”, which explored how CBDC could be used to cross-border payments amongst Hong Kong and Thailand.

Why is CBDC attracting interest from central banks all over the globe? For a start, the touchless characteristic of CBDC can considerably support fighting off the COVID-19 pandemic. The added benefits of CBDC do not quit here. For illustration, it can drastically decrease the cost of printing and handling funds. In Canada and the European Union, the fees of issuing and managing income account for some .5 % of their GDP. In acquiring international locations this kind of as India, such price tag can be as superior as 1.7 per cent. Although the issuance of CBDC also incurs price, the electronic format and systems employed ensure a significantly reduce charge.

With the usage of blockchain and other systems, CBDC can get rid of the require for intermediaries discovered in traditional finance, earning transactions less difficult, speedier and less costly. Presently, for every single US$100 cross-border transaction, US$7 goes to the intermediaries. Once CBDC is in use, the price tag of cross-border transaction will be significantly lessened, facilitating the international circulation of capital. CBDC can also enable endorse economical inclusion. At existing, about 20 p.c and 5 p.c of older people in Hong Kong and the Chinese mainland respectively do not have a digital wallet or bank account. CBDC can help them gain simpler accessibility to e-wallets, so that they could enjoy the comfort made available by fashionable fiscal providers with ease.

The rewards of CBDC for Hong Kong are even additional substantial. For Shanghai-Hong Kong Stock Link and Shenzhen-Hong Kong Stock Join, there is a threshold of 500,000 yuan (US$76,619) for person investors buying and selling south-certain, which implies many compact traders on the mainland are unable to take portion in Hong Kong’s lively financial industry. The most important rationale is that the mainland authorities are involved about the movement of income the moment it is invested in Hong Kong, consequently the restriction for less difficult checking of the cross-boundary investment decision routines. If the inventory transaction is designed through CBDC, it will be simpler for the regulatory authorities to trace cross-boundary financial investment flows, which means they may look at enjoyable the threshold restriction on traders. If the identical logic is utilized to the Larger Bay Area, CBDC can also aid aid funds flow inside the location, further strengthening Hong Kong’s function as a world wide financial heart.

Hunting ahead, Hong Kong is perfectly positioned to leverage CBDC to acquire a pioneering part in the electronic era. In the previous, the internationalization of renminbi led to the opportunity for Hong Kong to grow to be a world wide offshore renminbi middle. With the expansion of e-CNY, there is after all over again an opportunity for Hong Kong to further more bolster its job as a foremost offshore renminbi heart. At the exact time, creating on Challenge Lionrock, Hong Kong need to extend its analysis into CBDC, whilst exploring to connect HKD CBDC with e-CNY on the mainland. In the very long term, Hong Kong really should even further link up with CBDC in other nations, and establish the money infrastructures for the electronic era. The increase of CBDC is a large opportunity for the town to transform from a conventional monetary middle to a world digital economic centre, and it is an opportunity that Hong Kong should really not overlook.

The author is an Assistant Analysis Director and Head of Economic Improvement, and Judy Chen is a Researcher at Our Hong Kong Foundation.

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