HKMA launches next phase of CBDC pilot and sandbox

The Hong Kong Monetary Authority launched the second phase of its retail central bank digital currency (CBDC) pilot and a regulatory sandbox for stablecoin projects.

The HKMA completed the first phase of its pilot retail CBDC, called the e-Hong Kong dollar (e-HKD), in October 2023, working with 16 private firms. That phase tested retail use cases including offline and programmable payments, tokenised deposits and settling both Web3 transactions and tokenised assets.

The second phase will explore  areas where an e-HKD could “add unique value”. These include programmability, tokenisation and atomic settlement, it said in a statement today (March 14). It will also explore new use cases that have not yet been covered in the previous phase.

Participants will use an “enhanced e-HKD sandbox” to test and develop the various use cases. The sandbox will also support their research into the e-HKD’s interoperability with other forms of tokenised money, and the interbank settlement between them.  

The HKMA said the enhanced sandbox will leverage a wholesale CBDC sandbox it plans to build under Project Ensemble, a project it launched last week. Organisations interested in joining the retail CBDC pilot must apply before 17 May 2024. 

The pilot’s result, together with the CBDC expert group’s research, will inform official decisions on issuing an e-HKD. The CBDC expert group, consisting of 12 academics, was formed in October 2023.

Stablecoin sandbox

The HKMA also launched a regulatory sandbox for potential stablecoin issuers, it announced on March 12.

Participants must have a reasonable business plan for issuing stablecoins Hong Kong. They must also show a reasonable prospect of complying with regulations proposed by the HKMA and Hong Kong’s Financial Services and the Treasury Bureau (FSTB). 

On December 27, the HKMA and the FSTB, which is effectively Hong Kong’s finance ministry, proposed a stricter stablecoin regulation regime in a consultation paper.

The HKMA said it will use the sandbox to communicate its supervisory expectations to possible stablecoin firms, and collect feedback from them. 

Deputy chief executive Darryl Chan said in an article that it has not set a limit on the number of sandbox participants. 

Proposed stablecoin regime

Under the authorities’ current proposals, any licensed currency-based stablecoin issuers would have to hold reserves equivalent to the value of the stablecoins in circulation “at all times”. 

Issuers would also have to segregate their reserves from their other assets, and have liquidity risk management practices able to withstand a run. They would be obliged to “regularly” publicly disclose the total amount of the stablecoin in circulation, the mark-to-market value of reserve assets and their composition.

The HKMA has warned stablecoins based on arbitrage or an algorithm will probably fail to meet the proposed licensing criteria, especially on reserves management.

Chan said authorities had received over 100 responses in the public consultation that ended in February. The HKMA and the FSTB are studying the responses and will publish their conclusions as soon as practicable.