Submission to Hong Kong Monetary Authority on Discussion Paper on e-HKD: A policy and design perspective

1. The Consumer Council (the Council) is pleased to submit its views concerning the policy issues of introducing the retail central bank digital currency (rCBDC), i.e., e-HKD, as set out in a discussion paper (the Discussion Paper) issued by the Hong Kong Monetary Authority (HKMA).  The Council puts forward its point of views and suggestions regarding policy considerations from the aspects of consumer protection.

Overview

2. The Council welcomes the HKMA to invest efforts in researching the possibility of the issuance of e-HKD in Hong Kong.  According to the Bank for International Settlements, over 90% of the central banks surveyed_[1] globally engaged in CBDC in 2021, and all of them are working on rCBDC.  Furthermore, some of them are at the advanced stages of exploring a CBDC already.  From 2020 to now, the share of central banks currently developing a CBDC or running a pilot almost doubled from 14% to 26%.  Also, 62% are conducting experiments or proofs-of-concept.  As an international financial centre, Hong Kong could not lag behind its counterparts and should accelerate its exploration of rCBDC.

3. In recent years, there has been a growing adoption of privately-issued cryptocurrencies.  While there is a type of crypto-asset called “stablecoins” which attempt to lower their price volatility by pegging themselves to some other assets, these stablecoins do not constitute money creation by the central bank.  There are risks undermining payment integrity due to potential operational or financial failures of stablecoins_[2], as illustrated in Section 3.2 of the Discussion Paper.  Referring to Question 1 (Chapter 7 of the Discussion Paper), the Council considers rCBDC a much more secure option than stablecoins from a consumer protection perspective and that e-HKD can bring another choice and potential benefits of meeting the challenges of new forms of money as described in the Discussion Paper.

4. While the HKMA has the view that “a widespread use of stablecoins in Hong Kong remains a remote possibility” (Section 3.2 of the Discussion Paper), the Council opines that the development of stablecoins in Hong Kong is fast-evolving and the current situation may change rapidly.  It is crucial for the HKMA to anticipate changes in the market and consider providing a more secure and low-risk digital payment option, such as e-HKD, to consumers.

5. With regard to a fundamental issue about the value of e-HKD to Hong Kong consumers, the Council recommends the HKMA to conduct appropriate consumer study to understand how consumers perceive the use of e-HKD, the benefits and risks of various payment options, and their satisfaction and preference in daily usage.  This could help the HKMA assess consumers’ acceptance of e-HKD, alongside meeting the challenges of new forms of money and countering money laundering.

6. Given consumer understanding and confidence is fundamental to the success of rCBDC, the Council believes that consumer safeguard should be one of the top criteria in investigating the policy and design issues of e-HKD.  Thus, the Council puts forward some suggestions below for the protection of consumer interests for the consideration of the HKMA.

Enhancing ease of payment

7. The ability to “pay anywhere” and “pay anytime” is the most important feature of a new digital payment instrument.  In response to Question 3, the Council agrees with the HKMA to explore the interoperability of rCBDC with existing payment systems as mentioned in Section 5.2.  Payment system interoperability enables banks and other payment service providers to make payments across systems, hence allowing consumers to seamlessly move their money in and out of their rCBDC accounts.  Real-time interoperability is a fundamental feature for consumers to adopt rCBDC. 

8. At the same time, in order to encourage the usage of rCBDC, it should not carry any handling charge and should be as handy as using cash.  rCBDC should also support offline payment, such as via contactless wallets or NFC wearables, in case of network failure or in places without network coverage.

Ensuring cyber security and data privacy

9. As with any new technology innovation, cybersecurity and data privacy are undoubtedly crucial in increasing consumers’ confidence in using rCBDC.  As mentioned in Section 4.2, there is a possible increase in cyber security and software risks when using rCBDC, such as payment system being more vulnerable to cyberattacks and power/network outages.  Measures should be taken to mitigate such risks, and there should be a robust consumer protection mechanism to safeguard the interest of consumers and for them to seek for redress. 

10. Meanwhile, privacy and data protection are key elements to consider pertaining to rCBDC arrangement.  Regarding Question 5, the Council is of the view that the HKMA should investigate how to offer robust protection to consumers against misuse of data by any involved party.  For instance, as suggested by the World Economic Forum, techniques like differential privacy could be employed.  Differential privacy allows one entity to keep the low-level data within a dataset private, while sharing publicly the higher-level patterns and statistics based on the data.  Differential privacy could potentially be used in a rCBDC to aggregate data on the total amount transacted in a time period, while not leaking the individual data entries used across aggregations.  As a result, the privacy of individuals could be protected^[3].  In addition, although transaction records may act as digital fingerprints, rCBDC should not be used as an instrument for public surveillance to individuals, except for investigations relating to anti-money laundering or very exceptional circumstances.

11. Considering the possible issuance mechanisms for e-HKD, the Council agrees that Coins approach is a better option in terms of consumer safeguards as the Coins approach is simpler and more straightforward.

12. In response to Question 8 about e-HKD wallets, the Council supports the adoption of a tiered wallet approach to provide consumers with a greater degree of anonymity.  As mentioned in Section 5.3, the HKMA may consider different caps on transactions and balances for different types of e-wallets, for the benefit of the consuming public as economic activities are moving further online.

Encouraging financial inclusion

13. Referring to Question 9, to meet the needs and IT literacy of consumers, as well as to maintain the market stability, the Council opines that rCBDC should coexist with other means of payment.  While the launch of rCBDC should benefit the general public, the rate of adoption by different consumer segments would vary, especially the vulnerable ones, i.e. those with physical, visual, hearing or intellectual disabilities, as well as those who have low income and cannot afford equipment to access digital financial services.  The HKMA should not undermine non-digital payment tools before vulnerable consumers are capable of catching up the use of digital payment methods.  Although the distribution of consumption voucher has speeded up the digital payments in Hong Kong, to build a fair digital financial future, it is essential to allow more time for vulnerable consumers to adapt to rCBDC. 

Enhancing consumer education and support

14. In response to Question 12, taking as a whole, the Council considers education to nurture rCBDC understanding and alert consumers to rCBDC-related scams necessary.  For the former, it is important to teach consumers that e-HKD has the same legal mandate and tender status as existing Hong Kong dollar notes and coins but just works digitally.  Basic understanding could help increase consumers’ confidence in using rCBDC.  For the latter, consumers must be taught not to trust fraudulent mobile applications and platforms of rCBDC, and not to provide personal information to them.  In the Mainland, there have been frauds in Henan, Zhejiang, Sichuan, Hainan, Guangdong, Shandong, Jiangsu related to rCBDC_[4], such as consumers providing private keys or credentials because of phishing emails or fraud schemes.  Besides, unlike cash, consumers may easily spend more than expected by using e-HKD, so education on related topics is very vital.  The Council appreciates if the HKMA could ensure the adequacy of consumer education and technical support measures in encouraging the adoption of rCBDC. 

Conclusion

15. The Mainland has piloted rCBDC since April 2020.  As of the end of 2021, cumulative transactions in the currency have reached 87.57 billion yuan, with the number of individual digital yuan users having climbed to 261 million.  It is likely that other jurisdictions will follow the trend in the foreseeable future.  The Council deems that the HKMA can study the experience from other jurisdictions, especially experience in the Mainland, when designing a legally robust CBDC.

16. At last, the Council invites the HKMA to take into consideration the above views as well as the suggestions responding to the Discussion Paper.  As the development of rCBDC will pose substantial implications to the payment behaviour of consumers, the Council expects the HKMA to engage the consuming public closely in the development process, and to conduct pilot scheme to ensure the reliability, security and friendliness of rCBDC before its full launch.