Speech by Howard Lee, deputy chief executive, Hong Kong Monetary Authority, at BIS Innovation Summit 2021.
Fellow central bankers, distinguished speakers, ladies and gentlemen. It’s my pleasure to speak to you in this important event. While participants of this event generally embrace technology and innovation, I guess that two years ago not many of us could have expected that virtual meetings would become a norm for international conferences. So while technological advances would often drive work process or behavioral changes, there are also times when societal changes spur technological developments or adoption.
Of course the COVID-19 pandemic has had a lot more impacts than countless virtual meetings. The unprecedented disruptions and contractions in global trade have literally brought many economies to a standstill. Small and medium sized enterprises (SMEs) are especially hard-hit given the smaller buffers they have. On the other hand, many e-commerce and other online activities are thriving. We are experiencing a much accelerated process of digitalization on many fronts.
These new developments call for central banks’ innovations and digital solutions too. In the digital age, central banks will have to become innovators and commit ourselves to digital transformation for the benefit of our economies. In fact, the launch of the BIS Innovation Hub (BISIH) in 2019 is a testament to this commitment. For the coming year, BISIH have announced 6 thematic priorities for driving innovations and staying ahead of the digital challenges.
Responding to New Developments in the Payments Landscape
No doubt payment has been a key area for innovations in recent years. Traditional payment systems have undergone transformation, not least with the introduction of fast payment systems. And new payment methods have emerged in the private sector. Consumers are increasingly reliant on digital payments that offer better speed and convenience. However, when new forms of digital payment are increasingly used by the public, or even become the dominant means of payment in society, central banks would rightly be concerned about the resilience of the payment landscape, as disruptions could cause not just inconvenience, but also potentially significant economic damage.
At the same time, cryptocurrencies and stablecoins have emerged as a new class of assets that are sometimes claimed to be also a medium of exchange despite their volatility and concerns about their security. Widespread adoption of these digital currencies by the general public could also diminish the use of the sovereign currency, and even affect a central bank’s monetary operations.
Notwithstanding all these developments, the core role of central banks in ensuring trust in money as a public good for the economy at large remains unchanged. So whether central banks should provide a new form of central bank digital money completed with new payment infrastructure to households and businesses has become a very pertinent question. The subject of central bank digital currencies (CBDCs), be it wholesale or general purpose, has been high on the agenda of the central banking community. Apart from being a new and trusted digital means of payment, CBDCs could potentially also foster competition and innovation in the payment sector.
Here at the HKMA, we have been exploring technologies for both wholesale and general purpose CBDCs. At the wholesale level, we see great opportunities for CBDCs to enhance the efficiency of cross-border payments. Two years ago, we conducted a proof of concept with the Bank of Thailand to develop a DLT-based cross-border corridor network. Building on this fruitful collaboration and the experience gained, we are taking a further step to create more synergies with other central banks.
Under the auspices of the BISIH Hong Kong Centre, the HKMA, together with the Bank of Thailand, the Central Bank of United Arab Emirates, as well as the Digital Currency Institute of the People’s Bank of China, are embarking on a wholesale CBDC project called Multiple CBDC Bridge (m-CBDC Bridge). We aim to, through this m-CBDC Bridge, foster a collaborative environment for central banks and the private sector to further explore the potentials of DLT to improve the settlement and liquidity management efficiencies in cross-border payments. We are grateful for the participation from the private sector including two securities exchanges, banks, and multi-national corporates in the project. Such collaborative efforts give us much greater confidence that the ideas and solutions generated through this project would take account of the needs of various market players in different markets.
As with many other central banks working on this subject, we are yet to make a decision as to whether general purpose CBDCs will be issued. Indeed, designing a CBDC requires balancing manifold considerations, ranging from consumer needs to policy and technological considerations, against various potential risks. This could involve difficult trade-off in decision-making.
Therefore, we will study the benefits and challenges of different architectures for the distribution of general purpose CBDCs through commercial banks/payment service providers in our upcoming general purpose CBDC project, called Project Aurum. Specifically we will look into 2 architectural models, namely the hybrid CBDC and private CBDC-backed stablecoins. In parallel, we are working with the People’s Bank of China on a technical pilot testing of using e-CNY for cross-border retail payments in Hong Kong. We are extremely excited about these initiatives on CBDCs on multiple fronts, and I would be very happy to share more findings with you all as we make further progress.