Eddie Yue: Keynote speech - International Conference on Central
Bank Digital Currencies and Payment Systems
Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary
Authority, at the International Conference on Central Bank Digital Currencies and
Payment Systems, Hong Kong, 11 April 2024.
* * *
Kar Yan [Tam, Dean and Chair Professor, School of Business and Management,
HKUST], Dong [He, Deputy Director, Monetary and Capital Markets Department, IMF],
friends and distinguished guests, good morning.
Introduction
Welcome to today's conference and a very warm welcome to those who have joined us
from overseas. I would like to spend the next 15 minutes to share my thoughts on
central bank digital currencies, or CBDCs, and what it means for the future of money
and payment systems.
Throughout history, the evolution of money and its institutional foundations have closely
followed the advancements in technology. Today, we are witnessing a significant shift
in how we view and use money in our increasingly digital world.
The way we make payments is changing, with a decline in cash transactions and a
growing trend towards digital payments for goods and services. The developments in
the online space are even more interesting, with an explosion of new asset classes and
transaction protocols.
In response, some 130 central banks have been conducting research on CBDCs as an
advanced representation of central bank money for the digital economy. The HKMA is
an early mover in this respect, having started CBDC explorations since 2017 with
Project LionRock, which has since evolved into Project mBridge, one of the more
advanced explorations of a multi-CBDC platform globally.
Digital Money in the Tokenisation Era
A key technique that has underpinned and enabled this continued innovation is
tokenisation, a process of transforming the rights to an asset into a digital token,
represented on say a blockchain. This technique has the potential to enable the
interweaving of money and assets, whether in the physical or digital world. This could
in turn lead to a major shift in the way we perceive and interact with money and assets.
The HKMA is well aware of how emerging technologies and innovations like
tokenisation can potentially enhance the efficiency, transparency, and security of the
transactions for financial assets. We have, for example, assisted the Government in
issuing two series of tokenised green bonds in the past two years.
We have also been working closely with the industry to see how technological
innovation can improve the functionality of money. We invited the industry last year to
explore potential applications for an e-HKD, a new form of digital money. The first
phase of the e-HKD Pilot Programme had attracted enthusiastic responses, and we will
continue to experiment with the industry on different innovative use cases in the next
phase that we have launched last month.
We observed that tokenisation, alongside programmability, had the potential to
transform how money could better serve our financial needs, and that it could create
new opportunities for consumers and businesses to transact in new spaces and new
ways. These can potentially unlock new avenues for wider inter-industry settlements,
facilitate financial inclusion, enable seamless cross-border transactions, and enhance
the efficiency of capital markets.
The topics of tokenisation and programmability have since reverberated throughout the
industry, with pilot participants proactively sharing their insights, designs and
frameworks on how a digital money ecosystem could look like in future, which could
encompass retail and wholesale CBDCs in co-existence with other forms of money
issued by private firms. And by "digital money", I intend to also cover different types of
tokenised money, capable of supporting the settlement of tokenised assets and
transactions.
Publicly and Privately-issued Money
With this future monetary system, a key question to consider is what role central banks
should play in providing "digital money" to the public, like individuals and corporates. In
fact, some research studies show that over 90% of money used in modern economies
is private money, issued digitally by private entities like commercial banks.
Digital money should be designed with public interest in mind. Any digital money
should enable fast, convenient, seamless, and around-the-clock transactions between
consumers and businesses. Over the last decade, we have observed digital money
move beyond isolated systems and pure accounting ledgers in banking. What was
once confined to basic units of transfer has evolved into something far more
sophisticated and powerful, enabling end-to-end integration with different industries.
We envision this close-knit relationship between the public and private money to
continue. It goes without saying that the interplay between public and private money is
crucial in this regard, especially if we are to realise the full benefits of tokenisation, as
well as the full potential of CBDCs and other forms of digital money. Just as cash and
deposits exist harmoniously today, the tokenisation of our financial system will likely
involve a complementary relationship between a digital public money, like CBDCs, and
other forms of digital private money.
As central banks embrace these new forms of money, it is crucial for us to enable the
right financial innovations to flourish while ensuring that the core financial systems that
underpin our economy remain stable, trustworthy, and resilient. Sound regulations are
essential. And in some areas, we may also need to consider establishing shared
infrastructure for public goods, just as we have done with payment systems in the old
world.
So far as regulations are concerned, a delicate balance has to be struck. Too stringent
an approach may stifle financial innovation, as the industry becomes overly risk-averse
or reliant on the central bank to dictate the direction of innovations. An overly lenient
approach, on the other hand, could potentially undermine the central bank's
effectiveness as a stable monetary anchor for common citizens, businesses, and
financial institutions. This could result in a digital economy dominated by a few closed,
privately-run platforms that prevent the emergence of more affordable and efficient
solutions.
It is therefore crucial to strike the right balance between enabling innovation and
maintaining stability. Central banks should continue to play their role in the provision of
public money serving as a trusted monetary anchor, enabling the private sector to
confidently develop innovative, value-adding financial products for consumers and
businesses.
In this connection, a CBDC should be viewed in the context of these functions of the
central bank in the monetary system. To build on the current two-tier structure, central
banking institutions like the HKMA should underpin the foundation of our payment
systems. This is a model that we have explored together with the BIS Innovation Hub
in 2022 under Project Aurum, where wholesale CBDCs will be used by regulated
financial institutions, and customer-facing activities will be assigned to the private
sector, just like today under a two-tier system.
Keeping in mind these developments, through the lens of the regulator, it is clear that
we need a holistic digital money framework that will facilitate the healthy co-existence of
public and private money to support our future digital economy.
A Digital Money Framework
This digital money framework will encompass different forms of tokenised money, which
consumers and businesses will likely see and adopt in the years to come. Our intention
is to provide the necessary guidance and creative freedom for the industry to
experiment with new technologies and develop innovative solutions.
This framework is the collation of our previous work in close partnership with the
industry. This guidance is critical in an environment where debates on different forms
of digital money are proliferating not just in Hong Kong, but across the globe.
We envision that this digital money framework will comprise three key components from
the outset. These components are retail CBDCs, regulated stablecoins, and tokenised
deposits.
Retail CBDC
Today, individuals and corporates alike only have access to digital money issued by
private entities. As we are transitioning to a digital economy where most transactions
are conducted online, there may be a case for the HKMA to provide a digital form of
physical cash, that is a retail CBDC, for everyday payments.
From a more technical perspective, a retail CBDC could serve as a fundamental layer
to facilitate interoperability and interlinking between various entities participating in our
future digital economy. It could act as a bridge between different types of
privatelyissued digital money, and ensure all private money to be exchangeable with a public
money on demand and at par. A dollar is a dollar, regardless of who is issuing the
money, and that preserves the "singleness of money".
We also envision that a retail CBDC could be a potential "backbone" and anchor,
bridging a legal tender and digital assets, offering price stability and confidence needed
to empower more innovations, and developing a vibrant sector and ecosystem for
digital assets in Hong Kong.
Having said that, while a retail CBDC may represent a more advanced version of cash,
it remains to be seen whether the benefits of its issuance would outweigh the
risks. More research would also be required on how the introduction of a retail CBDC
would impact the broader financial system. Given the generally efficient and
competitive retail payment ecosystem in Hong Kong, we will continue to take a
usecase driven approach in thinking about whether and when to introduce a retail CBDC.
Stablecoins
For those of you who are familiar with Hong Kong's monetary system, you would know
that we have a relatively unique system, where the Government, through the HKMA,
has given authorisation to three commercial banks to issue banknotes in Hong
Kong. These banknotes are issued against payment to the Exchange Fund in US
dollars.
The digital version of this arrangement has been explored as a CBDC-backed
stablecoin under Project Aurum, and some economists have recently called this a
"reserve-backed token". This, I would say, is a close cousin of a CBDC, and the
difference would be whether the token is issued by the HKMA directly or through the
commercial banks.
But of course, stablecoins are more generally issued by nonbanks. Given that
stablecoins may be used in payments, the HKMA has been working to bring them into
the accepted regulatory parameters. We have recently completed the consultation on a
legislative proposal to implement a regulatory regime for stablecoin issuers. Under our
proposal, stablecoin issuers would need to ensure full backing of reserve assets, which
must be of high quality and high liquidity, so that stablecoin holders will be adequately
protected.
Tokenised Deposits
We should also not forget about the most commonly used digital money today, which is
bank deposits. Deposits today are already digital in nature, and are core to a
wellfunctioning banking and payment system.
Deposits can be adopted for use in a tokenised financial system. Simply put, bank
depositors may be allowed to convert their deposits into and out of their tokenised form,
i.e. tokenised deposits, which can circulate on distributed ledger technology
platforms. These tokenised deposits would represent a claim on the depositor's
commercial bank, just like a regular deposit. Financial institutions are already using
tokenisation to facilitate more efficient liquidity management across borders for
corporates, and tokenised deposits would be a natural step forward.
Over the past year, the industry has been trying out the idea of tokenised
deposits. Whilst the full potential of tokenised deposits has yet to be explored, we have
observed strong interest in this area, and we will continue to work closely with the
industry in developing commercially viable use cases.
A wholesale CBDC to support digital money
Finally, let me turn to the prospect of a wholesale CBDC, which could become the
instrument that underpins all the different forms of digital money that I have mentioned
earlier.
In a way, we already have a wholesale central bank-issued digital currency today,
which are the banks' reserves in our Real Time Gross Settlement (RTGS)
system. While synchronisation of ledgers achieved via enhancements to RTGS could
theoretically deliver atomic settlement, we consider it important to explore a tokenised
version of RTGS could support the growing market of tokenisation.
That is why we have announced the development of a wholesale CBDC sandbox under
Project Ensemble last month. Our goal is to explore the technical viability of interbank
settlement functionality between different institutions that have developed their own
ledgers and systems for tokenised assets. We want to maintain the ability for
wholesale financial transactions to settle in central bank money, the safest form of
money.
This wholesale CBDC could potentially forge a new financial market infrastructure that
bridges the existing gap between different forms of digital money, including a retail
CBDC, regulated stablecoins, and tokenised deposits.
Closing
We are at a pivotal moment in the evolution of money, and indeed, in the evolution of
our very concept of what "money" is, and what benefits "money" should deliver to keep
up with the times. The presence of new opportunities provides incumbents with the
impetus to innovate, and it can also open the door to better products and services. As
regulators, we must remain open-minded, responsive, and prudent to ensure we
continue to build on Hong Kong's position as an international finance centre.
As I have mentioned in other occasions, these projects are not and should not be
merely technology projects. Their implementation would entail far-reaching implications
on a wide range of issues relating to areas such as legal, regulatory, policy, financial
stability, privacy, cybersecurity, and interaction with existing payment methods.
That is why the HKMA has been fostering public-private collaboration among the
Government, industry and academia. We are conducting a number of research studies
with the CBDC Expert Group, which was formed last year, and we hope that the results
of some of these research studies will become available to the public later this year.
The conference today is in fact another fruitful form of such collaboration, and I look
forward to hearing your insights on CBDCs and the future of digital money.
Thank you.