Regulatory Influencer: Expansion of the e-CNY Pilot in Hong Kong and Potential Lessons for the Digital Euro

May 23, 2024
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The Hong Kong Monetary Authority and the People’s Bank of China have announced plans to expand the scope of their ongoing pilot of e-CNY, China’s central bank digital currency (CBDC), which will allow Hong Kong residents to set up e-CNY wallets and top them up via Hong Kong’s Faster Payments System (FPS).

The bigger picture

This expansion represents a great deal of firsts for the e-CNY, which has seen excellent uptake in China since its introduction a couple of years ago following China’s crypto ban.

This is the first time that the e-CNY will be trialed in a market outside the 23 cities in China where it has been initially piloted, and a much more economically liberal market at that.

This is also the first market for the e-CNY where users will not need local bank accounts to top up their wallets. Instead, users of some banks will be able to top up their wallets with Hong Kong dollar accounts, potentially providing key insights to the viability of a retail CBDC in the currency exchange market.

The introduction of the e-CNY in Hong Kong also represents the first time it will be available to consumers in a jurisdiction where it does not hold a monopoly on crypto transactions. Hong Kong has a burgeoning crypto market and has a comprehensive regulatory regime for crypto platforms.

How does this compare?

The e-CNY bears a striking resemblance to a number of features of the proposed digital euro.

Like the provisions in Chapter IV of the digital euro proposal, the e-CNY will allow any resident in Hong Kong to set up an e-CNY account and will allow them to fund and de-fund their accounts for traditional cash both online and at physical locations.

The e-CNY wallets will also have a holding limit of RMB10,000 (€1,300), a reasonably sufficient but not significantly large amount for retail payments in the region. This is consistent with Chapter V of the digital euro proposal that seeks to set a holding limit that makes the digital euro a transactional tool rather than a store of value. 

The availability of the e-CNY to residents of Hong Kong, which has a vastly different regulatory regime compared to China, and the ability to top up the e-CNY wallets with HKD accounts from 11 banks, also bears a remarkable resemblance to Chapter V of the EU proposal, which seeks to make the digital euro available to third country nationals, including those who do not use the euro.

Why should you care?

On the Asian front, the expansion of the e-CNY represents the first time that arguably the most successful CBDC so far enters a competitive crypto market and whether it sinks or swims may be a harbinger of what is to come for the vast number of retail CBDC projects in Asia.

From a European perspective, the expansion of the e-CNY may provide key insights on the future of the digital euro. A lot has been said in theory about the practicality of some parts of the digital euro proposal, including the availability of physical redemption locations, the enforcement of holding limits and the availability of it to people outside the eurozone. Given the sheer size of the potential e-CNY market, and the comparatively similar levels of economic liberalisation that Hong Kong and the EU share, it may well be a weather vane for the viability of the more complicated parts of the digital euro.

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