Market Data 
The Hong Kong Monetary Authority (HKMA) has launched the second phase of its digital currency pilot program, marking a significant step in its exploration of the digital money ecosystem. This phase expands on the initial pilots conducted 16 months ago, with a more comprehensive approach to testing potential use cases for the e-Hong Kong dollar (e-HKD) and tokenized deposits. The HKMA aims to share its findings with the public by the end of 2025, as part of its broader initiative to unlock the full potential of digital money.
The HKMA has selected eleven groups of firms from various sectors to participate in the second phase of testing, focusing on three key themes: the settlement of tokenized assets, programmability, and offline payments. These firms will examine the commercial feasibility of new forms of digital money within real-world settings, exploring how both individuals and corporations could potentially benefit from digital currency innovations.
The second phase follows the initial round of pilots, which tested use cases in six categories, including full-fledged payments, programmable payments (such as government grant disbursements), and the settlement of web3 transactions. The HKMA’s goal in this second phase is to delve deeper into the potential applications of digital currency and how it can be integrated into the existing financial infrastructure.
Collaboration with Industry Leaders
In its announcement, the HKMA emphasized the importance of collaboration with industry partners in shaping the future of digital money. The authority is working closely with both public and private sector entities to better understand the practical challenges of designing and operating a digital money ecosystem.
A key component of this collaboration is the e-HKD sandbox, a test environment that allows pilot participants to accelerate the development and testing of digital currency use cases. This sandbox was also utilized during the first phase of the pilot program, and it remains an essential tool for exploring the feasibility of digital money in various real-world scenarios.
The HKMA has also established an e-HKD Industry Forum, which will bring together industry-led working groups to make recommendations on specific topics, particularly in the area of programmability. This initiative reflects the authority’s commitment to fostering innovation in digital money and ensuring that Hong Kong remains at the forefront of fintech development.
Regulatory Landscape in the Asia-Pacific
The developments in Hong Kong are part of a broader trend in the Asia-Pacific (APAC) region, where several countries are actively exploring or implementing CBDC initiatives. While some nations, like China and India, are moving ahead with large-scale pilots, others, such as Australia and South Korea, are taking a more cautious approach.
Australia has conducted several CBDC experiments, including Project Dunbar, which tested the use of multiple CBDCs for international settlements. However, the Reserve Bank of Australia has not yet committed to issuing a retail CBDC, instead focusing on wholesale applications of digital currency.
In India, the Reserve Bank of India (RBI) is rolling out the digital rupee in a phased manner, with plans to gradually integrate it into the country’s financial system. This cautious approach reflects the Indian government’s desire to minimize disruptions to the traditional financial ecosystem while still exploring the potential benefits of CBDCs.
China, meanwhile, has been a leader in CBDC development, with its digital yuan already being tested in various sectors. The Chinese government views the e-CNY as a way to enhance the efficiency of the country’s payment systems and reduce reliance on cash.
Other APAC nations, such as South Korea and Singapore, are also conducting CBDC tests, although they have not yet committed to full-scale implementations. In South Korea, the central bank is currently testing the cross-border and offline payment capabilities of its digital currency, while Singapore’s Monetary Authority is focusing on the potential implications of a retail CBDC for financial stability.
Global Context: The Status of CBDCs Worldwide
The global landscape for central bank digital currencies (CBDCs) remains mixed, with only a few nations fully adopting retail CBDCs, and even fewer achieving widespread public acceptance. Notably, the Bank of Canada recently scaled down its work on a CBDC, citing a lack of immediate public demand. Similarly, the Reserve Bank of Australia (RBA) concluded that there is no clear public interest case for issuing a retail CBDC, although it continues to explore the potential for wholesale digital currencies.
In contrast, nations such as China and India are moving forward with more aggressive CBDC initiatives. China has been a leader in this area, with its digital yuan (e-CNY) already in circulation and integrated into various sectors of the economy. India, too, is making significant strides with its digital rupee pilot program, which has already garnered over five million users.
As Hong Kong embarks on its second phase of digital currency testing, it joins a global conversation on the future of money. While the HKMA has not yet committed to issuing a retail CBDC, its continued exploration of the e-HKD demonstrates a clear interest in understanding the broader implications of digital currency for both individuals and businesses.
Phase Two Themes: Use Cases and Participants
The second phase of the HKMA’s pilot program focuses on three main themes, with participating companies exploring a variety of use cases that reflect the evolving digital money ecosystem. These themes are:
1. Settlement of Tokenized Assets: Various firms are testing how digital money can facilitate the settlement of tokenized assets, including funds and securities. For example, Hang Seng Bank, Aptos Labs, and Boston Consulting Group are investigating the commercial value of settling tokenized funds on a public blockchain, while HSBC is exploring the use of digital money for secure transactions on permissioned distributed ledger technology (DLT) environments.
2. Programmability: This theme focuses on how digital money can be programmed to execute specific functions, such as prepayment scenarios or reward platforms. The Bank of China (Hong Kong), for instance, is working on creating smart contracts for prepayment scenarios using blockchain technology. Other firms, such as DBS and Mastercard, are exploring the potential for digital money to drive scalable environmental, social, and governance (ESG) reward platforms.
3. Offline Payments: Participants are also testing how digital money can be used for offline transactions, a critical feature for ensuring the usability of digital currency in areas with limited internet access. Bank of Communications (Hong Kong) and China Mobile (Hong Kong) are testing the use of e-HKD stored in mobile SIM cards to enable offline payments and transfers, while ICBC (Asia) is exploring anonymous e-HKD wallets for dual offline payments.
