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e-HKD: A Technical Perspective Summary

Core Content

The Hong Kong Monetary Authority (HKMA) has been actively researching Central Bank Digital Currency (CBDC) since 2017 through Project LionRock, which focused on the feasibility and implications of CBDC in domestic inter-bank payments, corporate payments, and debt securities settlement. This initiative laid the groundwork for further exploration of wholesale CBDC, leading to Project Inthanon-LionRock in 2019, a joint effort with the Bank of Thailand to study cross-border payments using CBDC. In 2021, the project was renamed Multiple CBDC Bridge (mBridge) and expanded to include the Central Bank of the UAE and the Digital Currency Institute of the PBoC, with strong support from the BIS Innovation Hub in Hong Kong.

In June 2021, the HKMA launched Project e-HKD, a feasibility study on retail CBDC (rCBDC), specifically the digitisation of the Hong Kong Dollar (e-HKD). This project is part of a broader global trend of CBDC research and aims to explore the potential benefits and risks of issuing e-HKD. The whitepaper is a key output of the technology experimentation study under Project e-HKD, focusing on the design and architecture of the rCBDC infrastructure.

Main Points

• CBDC Research Journey:

  • Project LionRock (2017): Initial exploration of CBDC in domestic financial systems.
  • Project Inthanon-LionRock (2019): Joint study with the Bank of Thailand on cross-border payments.
  • mBridge (2021): Expanded to include multiple central banks and focuses on DLT-based cross-border settlement.
  • Project e-HKD (2021): Feasibility study on retail CBDC, with the aim of exploring e-HKD's potential and risks.

• Purpose of the Whitepaper:

  • To explore potential architectures and design options for the rCBDC infrastructure.
  • To address key challenges such as cross-ledger synchronisation, over-issuance prevention, privacy-preserving traceability, and flexible distribution models.
  • To initiate a dialogue with academia and industry for collaborative exploration of rCBDC solutions.

• Proposed Architecture:

  • A two-tier system with a wholesale layer (central bank) and a retail layer (banks and PSPs).
  • The architecture is designed to be flexible, efficient, and open to change and innovation.
  • It enables privacy-preserving transaction traceability and cross-ledger synchronisation.
  • The architecture is not a blueprint for e-HKD but serves as a basis for further discussions.

• HKMA's Stance:

  • The whitepaper is not a decision-making document but a research output to inform future discussions.
  • The HKMA is open to innovation and does not yet have a final decision on the introduction of e-HKD.
  • The goal is to collaborate with the fintech community and academia to explore practical and robust solutions for rCBDC.

Key Design Considerations

The whitepaper outlines several key elements for a good design of a two-tier rCBDC system:

• Decoupling of wholesale and retail layers:

  • Ensures that the central bank is not directly involved in retail operations, reducing its exposure to cyber threats and operational burdens.
  • Adversaries are more likely to be found in the retail layer, so isolating it from the wholesale layer is essential for system security.

• Cross-ledger synchronisation:

  • The system must synchronise retail and wholesale ledgers to ensure the accuracy and integrity of transactions.
  • This is particularly important in systems where the retail and wholesale layers are decoupled.

• Privacy-preserving transaction traceability:

  • The system should allow for traceability while maintaining user privacy.
  • Techniques such as pseudonymity and dynamic public keys are considered to enhance privacy.

• Flexibility and reconfigurability:

  • The architecture must be adaptable to different distribution models and evolving requirements.
  • It should allow for scalability and efficiency in handling increasing transaction volumes and user numbers.

Key Design Questions

The whitepaper addresses the following design questions:

• How to prevent over-issuance of e-HKD?
• How to ensure privacy while maintaining transaction integrity?
• How to achieve cross-ledger synchronisation efficiently?
• How to design flexible and scalable two-tier distribution models?
• How to enhance cybersecurity and operational robustness?
• How to ensure compliance with regulations such as AML/CFT?
• What new functionalities can be enabled by rCBDC that are not possible with current payment systems?

Principles Guiding Solution Ideation

The design of the rCBDC infrastructure is guided by the following principles:

• Safety: Ensuring the security and stability of the CBDC system.
• Efficiency: Optimising performance and scalability of the system.
• Openness to change, innovation, and competition: Allowing for adaptability and fostering competition among private sector participants.

Solicitation of Input

The HKMA has identified seven key problem statements for further discussion and invites input from academia and industry:

1. Privacy: Studying different privacy models and proposing designs that maintain user privacy while ensuring system integrity.
2. Interoperability: Researching interoperability between conventional FMIs and DLT-based systems.
3. Performance and Scalability: Evaluating trade-offs between performance and security/privacy, and enhancing scalability.
4. Cybersecurity: Identifying attack vectors and proposing efficient solutions to maintain cyber-resilience.
5. Compliance: Exploring methods to ensure regulatory compliance, particularly in AML/CFT.
6. Operational Robustness and Resilience: Designing systems that can operate correctly under various conditions and recover from failures.
7. Technology-Enabled Functional Capabilities: Investigating how rCBDC can improve existing payment applications and introduce new functionalities.

The HKMA encourages feedback and suggestions for improvement by 31 December 2021, to be submitted to fintech@hkma.gov.hk.

Conclusion

The whitepaper serves as an initial exploration of the technical architecture for e-HKD, focusing on flexibility, privacy, and scalability. It outlines the HKMA's research journey, the purpose of the whitepaper, and the design principles that should guide the development of rCBDC infrastructure. The document is intended to foster collaboration and open dialogue with the fintech community and academia to ensure that the final design of e-HKD is robust, secure, and user-friendly.