Hong Kong watchdog warns stablecoins could undermine HKD in CBDC paper

The Hong Kong Monetary Authority (HKMA) has warned that stablecoins could undermine the Hong Kong dollar in a recently released discussion paper about its retail central bank digital currency, e-HKD. 

The HKMA today issued a discussion paper, outlining the policy and design issues involved in the introduction of e-HKD, and encourages the public and industry to participate in the consultation and share their views. Find out more: https://t.co/GndjuZ2Pay pic.twitter.com/hRz2noD0Ps

— HKMA 香港金融管理局 (@hkmagovhk) April 27, 2022

Many in the crypto industry believe that interest in developing central bank digital currencies (CBDC) has been in response to the rise of private-sector stablecoins. This discussion paper appears to confirm that view.

“With continued developments in stablecoins, it cannot be ruled out that a popular stablecoin may eventually emerge,” wrote the HKMA as part of the “e-HKD: A Policy and Design Perspective” discussion paper released on Wednesday.

“In a scenario where the use of these stablecoins becomes widespread […] the role of the domestic currency as the single unit of account could be undermined.”

The authority also highlighted risks that such stablecoins could undermine payment integrity due to operational or financial failures or allow for greater ease of capital flight during a financial crisis period, which would undermine the control of central banks over the local economy.

The HKMA first announced its plans to study a retail-focused central bank digital currency in June 2021 as part of its “Fintec 2025” strategy. However, the authority has also been studying to merits of issuing a wholesale CBDC since 2017.

Retail CBDCs (rCBDCs) are targeted toward the general public and used for everyday transactions. Wholesale CBDCs are issued only to financial institutions and are aimed at making their transactions faster, less expensive, and more secure.

The monetary authority has made no commitment to introducing a digital currency. The most recent discussion paper merely invited industry leaders and consumers to provide additional feedback on the potential challenges and benefits of the proposed rCBDC.

It also asks for feedback on certain design considerations such as an appropriate rCBDC issuance mechanism, interoperability across large-value and retail payment systems, privacy and data protection, legal considerations, private sector participation and potential use cases.

Across the border in mainland China, the central bank digital currency continues to pick up steam. Earlier this month, the People’s Bank of China (PBOC) said it will be expanding its digital yuan trial to six more cities, adding to the existing 10 major pilot cities already undergoing trials.

Related: Fitting the bill: US Congress eyes e-cash as an alternative to CBDC

Meanwhile, the Philippines government on Wednesday announced that it will be pursuing its own pilot project for a wholesale central bank digital currency, called Project CBDCPh, which it envisions will be used for cross-border payments, equity securities payments and intraday liquidity facilities (ILF).