China’s digital yuan is coming to Hong Kong.
On Dec. 4, Hong Kong Monetary Authority chief executive Eddie Yue revealed in a press statement that his agency is working with the People’s Bank of China (PBoC) on a pilot program to use the nascent digital currency for cross-border payments.
While Hong Kong is part of China, it is a special administrative region, meaning it has a border and a separate central bank. Which makes it an excellent cross-border test partner for the digital currency China is testing.
Yue’s statement—which refers to China’s central bank digital currency (CBDC) as both the “e-CNY” and the “digital renminbi” rather than the digital yuan—said technical preparations are underway to begin cross-border payment evaluation.
As China’s yuan renminbi fiat currency “is already in use in Hong Kong and the status of e-CNY is the same as cash in circulation, [the e-CNY] will bring even greater convenience to Hong Kong and Mainland tourists,” Yue wrote.
The blink of an eye
Yue said that Hong Kong is ahead of the curve when it comes to digital payments, pointing out that the region’s use of e-payments is among the highest in the world.
Beyond that, the HKMA already has the Faster Payment System (FPS) in place, enabling “instant fund transfers across different banks or platforms… in the blink of an eye.”
Noting that national digital payment services are fairly common around the world, Yue said “development in cross-border payment is obviously lagging behind… [with] common issues such as a long processing time, high cost and low transparency.”
Cross border payments are seen as a low hanging fruit use-case by a variety of cryptocurrency firms, notably Ripple, which has attracted more than 300 banks and financial institutions to its RippleNet service, and Stellar. When Facebook launched the Libra stablecoin project this summer, making cross-border remittances relied upon by the poor far cheaper and faster was pitched as a major benefit.
Along with the forthcoming e-CNY tests with China, the HKMA is also working with the Bank of Thailand to address cross-border payment issues with a blockchain-based CBDC. That test has entered the second phase, Yue said. It is now “exploring specific business applications as well as the operability and scalability of the platform to allow the participation of three or more CBDCs,” he said. He added:
“Have you ever wondered that maybe someday, we will also be able to make real-time, cross-border payments in the blink of an eye regardless of where we are?”
Red envelope testing
The PBoC has been running real-world tests of its digital currency since April when it launched in Shenzhen, Chengdu, Suzhou, and Xiong’an. It was later expanded to include Beijing, Hong Kong, Macau, and the wealthy Guangdong province. In early November, a PBoC governor said $300 million in yuan renminbi had been spent in the programs.
The PBoC also ran a successful public stress test of its digital currency in Shenzhen, giving away $1.5 million worth of digital yuan renminbi to 50,000 citizens in a lottery. Each winner received 200 yuan—worth about $30—and had a week to spend it.
Using the “red envelope” windfall required work, as winners had to download a special wallet and could only spend it at 4,000 participating merchants. Another one took place in Suzhou in late November.
Despite that, a full launch of the e-CNY digital currency is not imminent, PBOC Governor Yi Gang said in early November. For one thing, the country still needs to draw up a fairly complex legal framework for its CBDC, he said.