HKMA says not sure whether a central bank digital currency is needed in Hong Kong



29th April 2022 – (Hong Kong) The Hong Kong Monetary Authority (HKMA), the Chinese Special Territory’s central bank, published a policy paper this week outlining the possible directions a Hong Kong-issued central bank digital currency (CBDC), which it’s calling an e-HKD, could take. The issues that have prompted other countries to explore a central bank digital currency don’t exist to the same extent in Hong Kong.

CBDCs, a digital version of cash issued by central banks as opposed to money issued by commercial banks, has been explored by central banks worldwide, including Sweden, the Bahamas and Canada. But most critically for Hong Kong, its largest trading partner, China, has developed and is slowly deploying its own CBDC, called the e-CNY.

Each region has its own reasons for deploying a CBDC. In Sweden bankers are concerned about the declining use of cash; in the Bahamas the government looks to build out a system for financial inclusion; Canada’s central bank sees the need for increased competition for retail deposits; while the People’s Bank of China wants to wrestle away the control AliPay and WeChat pay have over the nation’s money supply.

All these issues brought up by other governments exist to some extent in Hong Kong. But HKMA’s assessment is that these issues don’t exist to the point of warranting the introduction of a retail-focused CBDC (which it calls a rCBDC in the paper).

“Although rCBDC is meant to be a digital extension of cash, its potential demand is highly uncertain,” the HKMA wrote. “The potential holders may need to switch funds out of their deposit accounts for rCBDC, which would affect the balance sheets of commercial banks and lead to disintermediation of banks.”

The HKMA’s analysis shows potential for a squeeze on banks’ interest margins and profitability because deposits will decline as consumers swap out bank deposits for an rCBDC where deposits are stored, with the central bank potentially adding costs (ironically) for consumers.

“Banks may also opt to pass the higher funding cost to their customers by imposing a higher lending spread,” the HKMA noted. “In the remote case where the increase in funding cost and lending spread lead to a tightening in overall credit conditions, consumption and investment activities would inevitably be affected.”

The HKMA doesn’t see this as a scenario that is likely to play out because it’s likely that an rCBDC would be unremunerated – meaning it would be without an incentive structure in place like negative interest rates.

“The attractiveness of e-HKD as a store of value over bank deposits should also be limited, and hence the bank disintermediation risk should be manageable,” the HKMA said.

On the customer-facing side, the HKMA isn’t exactly sure what pain points the rCBDC would address. Hong Kong, it said, already has a “plethora of convenient retail payment options available” that are resilient and highly efficient. Mass adoption will only happen if there’s an obvious pain point that this solves.

This existential question of why a CBDC is really necessary has been brought up by central bankers before, in many of the countries that have explored the technology.

While consulting groups like Accenture (ACN) and their lackeys might produce white paper upon white paper extolling the virtues of the technology, it remains unclear if it’s still a necessity.

A Bank of Canada research paper on the topic found there may be marginal theoretical gains from welfare distribution via CBDC, but the public’s perception of the platform’s net benefit remains a challenge.

Speaking on the topic in 2021, U.S. Federal Reserve chair Jerome Powell came out as a skeptic about its necessity.

“The real threshold question, for us, does the public want or need a new digital form of central bank money to complement what is already a highly efficient, reliable and innovative payments system?” he said at the time.