They have unveiled two central bank digital currency (CBDC) prototypes in Hong Kong.
Interestingly, one of the proposed tokens is a stablecoin that makes payment in CBDC, Ledger Insights claims. The other prototype is a token they will for bank-to-bank transactions.
A CBDC is a digital currency or cryptocurrency that a central bank issues. Consequently, the CBDC is a fiat currency. A stablecoin is a token that contains a smart contract that makes payment in cryptocurrency or fiat currency. For example, Tether (USDT) makes payment in US Dollars.
Project Aurum
The two tokens are part of Project Aurum. Project Aurum is a digital currency ecosystem that contains a network of banks and a retail e-wallet system. Hence, Project Aurum will connect consumers, banks, central banks, and retailers.
The Bank of International Settlements (BIS) Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority (HKMA), and the Hong Kong Applied Technology Research Institute are building Project Aurum.
Project Aurum will facilitate interbank transactions with intermediated CBDC and retail transactions with CBDC stablecoins. The stablecoins will payment in the intermediated CBDC in the interbank system. Hence, the stablecoins make payment in bank-held CBDC.
CBDC Stablecoins
The ultimate hope of Project Aurum is to create a CBDC stablecoin that can mirror the cash economy. In other words, they are building a stablecoin that operates like cash.
The BIS calls the intermediated CBDC “a direct liability of the central bank.” In contrast, the CBDC-backed stablecoins will be liabilities of issuing banks. Hence, the BIS wants to give private banks the ability to issue CBDC-backed stablecoins.
They completed Project Aurum in July 2022. Hence, they are now testing the system.
They call the initiative Project Aurum because Aurum is the Latin word for gold. They claim a “digital currency issued under the auspices of a central bank must be as robust and trustworthy as gold.”
You can find full reports about Project Aurum on the BIS website. The Bank of International Settlements (BIS) is a bank for central banks. The Hong Kong Monetary Authority (HKMA) is Hong Kong’s central bank.
BIS officials hope Project Aurum will become a model for other retail CBDC systems. The BIS website states they are building other retail CBDC but did not say what other central banks are participating in.
Hong Kong Cross Border Central Bank Digital Currency Efforts
Interestingly, Project Aurum is one of at least three CBDC efforts the HKMA is participating in.
For instance, the HKMA and the Bank of Israel have launched Project Sela. Project Sela researches CBDC cybersecurity issues. For example, Project Sela will research CBDC’s vulnerabilities to cyberattacks. Project Sela will build CBDC defenses against cyberattacks and hacking.
A HKMA press release says Project Sela builds on “foundations laid by Project Aurum.” Hence, Project Sela could be the next stage of Project Aurum.
Another effort is the Multiple Central Bank Digital Currency (m-CBDC) Bridge Project. The m-CBDC Bridge researches the use of CBDCs for cross-border payments. For example, the use of Hong Kong CBDC to pay for Middle Eastern oil. Potential uses of m-CBDC Bridge are real-time cross-border foreign exchange (Forex) transactions, cross-border fund transfers, international trade settlements, and capital market transactions.
The m-CBDC Bridge is a joint effort of the HKMA, the Bank of Thailand, the Central Bank of the United Emirates, and the Digital Currency Institute of the People’s Bank of China. The HKMA hopes more central banks will join the m-CBDC Bridge project.
They hope to develop a proof-of-concept prototype to show cross-border CBDC payments are feasible. m-CBDC will research use of domestic and foreign CBDCs.
An earlier HKMA and Bank of Thailand effort called Project Inthanon-LionRock studied the use of CBDC and digital ledger technology (blockchain) for cross-border payments.
Hong Kong Monetary Authority (HKMA) plans retail CBDC
At home, the HKMA is researching the feasibility of a retail CBDC it calls e-HKD. That means electronic Hong Kong Dollar. They hope to make e-HKD programmable so it is easier to use.
A retail CBDC is just like the coins and banknotes a central bank issues. To explain, they record a retail CBDC’s creation at the central bank. Theoretically, that means the retail CBDC is free of credit risk because the central bank guarantees it. Importantly, you can convert the retail CDBC to cash through the banking system. For example, an ATM could convert e-HKD into paper HKD.
Interestingly, HKMA officials think e-HKD will not find widespread use in Hong Kong because of popular existing electronic payments systems. However, they think the e-HKD could be popular outside Hong Kong and a means of facilitating trade.
The HKMA has made no decision about releasing e-HKD. However, HKMA officials think several years of research could be necessary before the e-HKD release.
Hong Kong is a Center of CBDC Research
It appears Hong Kong is now a center of CBDC research. Therefore, Hong Kong could become a major trading hub for cryptocurrency and CBDCs. Speculators need to watch the CBDC research in Hong Kong because it could create new assets, new markets, and new opportunities.
One reason for the HKMA’s CBDC research is to increase the use and value of the Hong Kong Dollar. Mr. Market valued the Hong Kong Dollar at $0.13 (13₵) on 24 October 2022.
Another reason for the HKMA and BIS CBDC efforts to create alternatives to the US Dollar. For example, the HKD could function as a gateway to the Chinese Yuan or Reminibi. The fiat currency of the People’s Republic of China. Hong Kong is part of the People’s Republic.
The People’s Bank of China (PBOC) is developing its own CBDC they call the E-CNY. I think the E-HKD and an HKD CBDC-backed stablecoin could serve alternatives to the E-CNY for companies and individuals trading in China.
Speculators need to watch Hong Kong because it could become a leader in the development of CBDCs and stablecoins.
