23 Nov 2022



The Hong Kong Monetary Authority (“HKMA”) released a position paper titled “e-HKD: Charting the Next Steps” on 20 September 2022 (the “Position Paper”) to set out its policy stance on retail Central Bank Digital Currency (CBDC), i.e. e-HKD, and outline its next steps. Based on the findings and comments received from the technical whitepaper titled “e-HKD: A technical perspective” published in October 2021 and the policy discussion whitepaper titled “e-HKD: A policy and design perspective” published in April 2022, the HKMA considers it necessary to start paving the way for possible future implementation of e-HKD. In this news update, we will focus primarily on the development of e-HKD, its legal status, and relevant features contemplated under the Position Paper.

Charting the Next Steps of e-HKD

Set out below is the approach and model envisaged by the HKMA to implement e-HKD as discussed in the Position Paper:-

Three-rail Approach The HKMA will adopt a “three-rail approach”, by exploring the phases to promote and prepare for the launch of e-HKD in Hong Kong:1
  • Rail 1 – laying the technology foundation to suit different design choices and legal foundations for issuance of digital form of fiat currency
  • Rail 2 – deep-dive research on use cases and designs, such as projects on access to e-HKD via e-wallet app, cybersecurity, DvP settlement of tokenised securities
  • Rail 3 – rolling out e-HKD
  • Two-tier Distribution Model
  • It consists of two separate, connected layers, namely, the wholesale interbank system and the retail user wallet system.
  • The HKMA favours the adoption of a two-tier distribution structure.
  • The HKMA would first proceed to develop the wholesale, interbank tier (wholesale layer). The target is to develop a technical foundation that can suit different design choices for the retail layer with relatively little modification further down the road.
  • The HKMA will explore with retail payment market participants whether and how e-HKD can fill any gaps in the existing market. 2
  • Features of e-HKD

    As explained in the Position Paper and the whitepapers, e-HKD should have the following various features:-

    Legal Tender Status
  • The HKMA is currently inclined to the view that e-HKD should be accorded legal tender status, to ensure alignment in status between the digital form and the physical form of legal tender currency/bank notes (issued under the Legal Tender Notes Issue Ordinance) and coins (issued under the Coinage Ordinance), these ordinances will be amended to give effect to e-HKD’s legal tender status.
  • This means, absent any contractual term to the contrary, e-HKD as legal tender, would by law be regarded as a valid and legal means of tendering payment for an incurred debt. 3
  • The HKMA considers that by assigning e-HKD as a legal tender with an unambiguous legal foundation for issuance, public confidence in e-HKD will be fostered. As is the present case of physical currency, contracts allow parties to commercial transactions to determine their means of payment, thus the law would not compel goods or service providers to accept e-HKD as payment, or prohibit a person from contractually refusing to accept e-HKD as payment. 4
  • Cybersecurity and Anti-Counterfeiting
  • The HKMA believes that cybersecurity is of utmost importance to maintain public trust in e-HKD, with the majority of respondents to the technical white paper agreeing that cybersecurity needs to take precedence over efficiency for CBDC platforms.5
  • On the other hand, there is a concern over counterfeit e-HKD. In order to secure the authenticity and restrict the “double-spending” of e-HKD, technology-based measures should be considered.6
  • Moreover, the HKMA suggests criminalising the counterfeit of e-HKD by adopting a digital equivalent of the current anti-counterfeiting provisions to protect and bolster confidence in e-HKD. 7 In particular, it is a criminal offence under Section 103 of the Crimes Ordinance to “reproduces on any substance… any Hong Kong currency note” without the consent of the HKMA.
  • Interoperability
  • With multiple countries releasing their own CBDC, the HKMA considers it important that e-HKD should, so far as practicable, be fully interoperable with other payment systems which would enable the public to make more efficient payments without impediment.
  • Moreover, the HKMA would also consider connectivity and the possibility to adopt future innovations in facilitating cross-platform payment and future development.8
  • Anti-Money Laundering (AML)/Counter Terrorist Financing (CFT) Regulations
  • The HKMA agrees that regulatory and compliance standards would be duly regarded in the design architecture of e-HKD.9
  • In line with the “same risk, same regulation” principle, 10 it also agrees that existing requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Payment Systems and Stored Value Facilities Ordinance should apply to transactions using e-HKD as far as possible, with intermediaries being responsible for meeting the AML/CFT requirements.
  • Data Privacy Protection
  • There is a question over what parties (e.g. central bank, wallet operators/banks and merchants) should have access to what degree of information (e.g. user identity, transaction history), and of particular importance is the degree of anonymity vis-à-vis the central bank.
  • The overarching principle is that the e-HKD system should at all times comply with the Personal Data (Privacy) Ordinance and relevant codes of practice, guidelines and best practices issued by the Office of the Privacy Commissioner for Personal Data.11
  • Privacy and data protection should be embedded in its system design and operation, while ensuring effective AML/CFT controls.
  • Tiered-account Structure
  • The HKMA would take note of the suggestions that e-HKD should come with a “tiered-account” structure, i.e. different levels of transaction/holding limits or functions depending on the level of KYC, to strike a balance between factors such as usability and privacy.12
  • Analysis and Takeaway

    The regulators have been relatively proactive in the Fintech scene, rolling out various new regimes and guidance. With the rapid development in Fintech and VAs, the Hong Kong Government, the Securities and Futures Commission (“SFC”) and the HKMA have consistently strived to set up an effective regulatory framework for the Fintech industry in Hong Kong to prosper. The Position Paper on e-HKD is one of the many examples in this aspect.

    Indeed, the Hong Kong Government has been active in establishing the regulatory framework for the Virtual Assets (“VA”) market, including the gazettal of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 to introduce a new licensing regime for VA service providers (“VASPs”) which will take effect on 1 March 2023. In addition to the initial step to allow VA access under the new licensing regime. On the same day as the Financial Services and the Treasury Bureau announced its Policy Statement on Development of Virtual Assets in Hong Kong, the SFC also published a circular on the VA futures exchange traded funds (ETFs) in Hong Kong. 13

    Since e-HKD is a digital form of legal tender, the Government believes the significance of e-HKD lies in its potential to serve as the potential “backbone” and anchor bridging legal tender and VA. 14 The HKMA also puts “DvP settlement of tokenised securities in its pipeline of projects for e-HKD. This would offer settlement efficiency, price stability and confidence to empower more innovations in the field of security token offerings and different types of VA, which in turn increases the competitiveness of the Hong Kong VA market and attract VASPs to operate and settle in Hong Kong. This has the potential of significantly enhancing Hong Kong’s payment efficiency through interoperability and synchronisation with the Faster Payment System (FPS). We welcome such development and look forward to the future enhancement and development of the Hong Kong Fintech ecosystem as a whole.

    Please contact our Partner Mr. Rodney Teoh and our Associate Calvin KW Lo for any enquiries or further information.

    This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

    1 HKMA Position Paper “eHKD – Charting the Next Steps” pp. 9-11
    2 HKMA Position Paper “eHKD – Charting the Next Steps” pp. 8, 10
    3 HKMA Position Paper “eHKD – Charting the Next Steps” p. 36
    4 HKMA Position Paper “eHKD – Charting the Next Steps” p. 37
    5 HKMA Position Paper “eHKD – Charting the Next Steps” p. 7
    6 HKMA paper “e-HKD: A policy and design perspective” p. 35
    7 HKMA paper “e-HKD: A policy and design perspective” p. 35
    8 HKMA Position Paper “eHKD – Charting the Next Steps” pp. 15-16
    9 HKMA Position Paper “eHKD – Charting the Next Steps” p. 18
    10 HKMA Position Paper “eHKD – Charting the Next Steps” p. 29
    11 HKMA paper “e-HKD: A policy and design perspective” p. 33
    12 HKMA Position Paper “eHKD – Charting the Next Steps” p. 22
    13 SFC. Circular on Virtual Asset Futures Exchange Traded Funds.
    14 The Financial Services and the Treasury Bureau. Policy Statement on Development of Virtual Assets in Hong Kong.