Three big CBDC stories: Digital euro delivers on privacy , Hong Kong goes full speed ahead with e-HKD, and Australia's new pilot reaches out to innovators
Holiday edition
1. The ECB will keep their hands off your CBDC data
2. Hong Kong goes full speed ahead with e-HKD
3. Australia reserve bank’s new CBDC pilot
Motor boat at full speed, Benedetta Cappa1922/1922
Galleria d'Arte Moderna Rome, Italy
1. The ECB will keep their hands off your CBDC data
The ECB delivers a big win for digital euro privacy by keeping their hands off your data!
Digital euro launch in 2025? Read the latest progress report from the ECB with even more high-level policy decisions on the digital euro.
Download: here
No data means no spying
The ECB wisely decided that the best policy for maintaining public trust in CBDC is simply not to touch the data! They can’t spy on you if they don’t have the data. It’s that simple.
The ECB announcement is huge:
"The Governing Council approved the pursuit of an online third-party validated solution as part of the first digital euro release. This covers the broadest set of high-level use cases, is considered to be able to support Eurosystem policy objectives, and leaves room for flexibility in other design decisions related to the digital euro"
What does this mean for privacy?
“A digital euro would provide a level of privacy equal to that of current private sector digital solutions.“
Third-party validation of digital euro transactions does two things for the ECB:
1️⃣ It allows the ECB to honestly claim that it doesn’t have your data, because they will not be part of the payment validation process. Critics will have a tough time explaining how the ECB is spying on your digital euro transactions without the data.
The ECB says it will leave validation to “third parties.” Let’s be clear, third parties are banks and perhaps newer entrants like telecoms. Banks already have your KYC data and by pushing validation to them they will be responsible for protecting your identity and AML/KYC as they do now. The public is comfortable with this arrangement.
2️⃣ The ECB will also be able to show banks that they are not undercutting their business. This is critical if the ECB wants to win over banks and get their support for the digital euro. By ensuring banks that they have an ongoing role in your cash transactions the ECB can placate banks who are reluctant at best to support a CBDC.
What do you give up with this?
Let’s be clear that CBDC’s highest calling is to allow you to make payments without a third-party (bank) intermediary. So while the ECB gains the support of banks and delivers a win for privacy they sacrifice direct P2P transactions.
But don’t give up hope…
The ECB also claims that they will pursue two P2P transfer scenarios. “Selective privacy” which would allow greater privacy for low-value/low-risk payments and “offline functionality” for low-value payments.
So the ECB giveth and taketh away from banks. Giving them validator status while leaving the door open for direct P2P low-value payments, just like China is doing!
This is a fair compromise that most fair-minded citizens should support.
Takeaways:
This document is a win for the digital euro by maintaining privacy at existing levels.
Banks get an ongoing role and will likely drop resistance to the digital euro.
P2P direct payments with a limit will still be possible.
2. Hong Kong goes full speed ahead with e-HKD
Hong Kong is going full speed ahead into the future with a retail CBDC and isn’t looking back!
The BIS announced that its mCBDC pilot has successfully transferred some US$22 million in CBDC. The e-HKD will be a critical link that will help connect Hong Kong’s financial system to China’s e-CNY and the world.
Download: here
Last week Hong Kong’s central bank the Hong Kong Monetary Authority (HKMA) announced that it was officially going to build a retail CBDC!
This is a bold move for Hong Kong who will eventually use its CBDC to help it in the fight for fintech supremacy with Singapore and for payment efficiency with the world!
Hong Kong will be the world’s leading CBDC exchange
MCBDC the world’s first CBDC exchange platform is in pilot NOW in HK! This week mCBDC announced it had transferred $22mn in cross-border value! Hong Kong wants in on this breakthrough to become the world’s leading CBDC exchange center. With the PBOC’s e-CNY as the first major CBDC in the world this scenario is almost guaranteed. Participants in the mCBDC project include the BIS Innovation Hub Hong Kong Centre, HKMA, Bank of Thailand, the Digital Currency Institute of the The People's Bank of China and the Central Bank of The UAE. This is a very serious effort with tremendous implications for the monetary system and will likely come out of pilot into production in 2024.
All bankers are not the same
The most remarkable part of the paper is that the HKMA called for feedback from industry and shockingly the majority of financial institutions supported the retail or rCBDC!
“In total, 75 responses were received (technical whitepaper: 36 responses; policy discussion paper: 39 responses) from stakeholders in various sectors... "
"Overall, the feedback received indicates that respondents are supportive of the e-HKD initiative and believe that rCBDC has the potential to make payments more efficient while supporting the digital economy. This positive sentiment was observed across various sectors.”
Now compare this to the Fed who received some 60+% negative comments on building a digital dollar retail CBDC when they asked for feedback. Unsurprisingly, most of the banking sector was radically opposed!
Why is Hong Kong so different?
My take is that Hong Kong’s financial services sector understands that its future depends on using the most advanced technology in the industry to remain relevant. Without it, they will become an also-ran to neighboring Singapore which just last week beat HK in the world financial center rating. Honk Kong needs an edge and CBDC will most definitely help!
Compare this attitude to the US financial services sector who is mostly concerned about CBDC's impact on domestic profitability. There is no competition and any hit to revenue by CBDC is seen as a threat to be eliminated. Banks and their lobbyists went into high gear to write the Fed and tell them that CBDCs are a bad idea.
Comparing US and Hong Kong shows how bankers in different nations can think very differently about CBDC! Hong Kong shows that all bankers aren't cut from the same cloth.
Hong Kong has a "three rail" plan for CBDC roll-out that is sensible but offers no hard dates.
My bet is they'll have it in trials in 2 years to capture e-CNY business on the mCBDC transfer system.
Takeaways:
Hong Kong is building a retail CBDC to ensure that it becomes a center for CBDC exchange.
The e-HKD will give Hong Kong something that Singapore does not as the two Asian fintech centers fight it out for dominance.
Hong Kong’s bankers supported a CBDC which shows that not all bankers see CBDC through the same lens.
Watch as e-HKD and e-CNY make Hong Kong the world’s leading CBDC exchange!
3. Australia reserve bank’s new CBDC pilot
My birthday present this week was the Reserve Bank of Australia’s CBDC pilot white paper for the "eAUD!"
Download: here
On this week of my 61st birthday, we’ll look at why Australia is pressing ahead with CBDC research despite its earlier reluctance.
Back in 2020 the RBA declared that: “The Bank's view is that there is currently no strong public policy case to introduce a CBDC for retail use.” To RBA’s credit, they are keeping an open mind and actually want to see if they missed something.
Am on holiday this week so forgive me if I write less than normal and am unable to highlight RBA’s document. I’m only targeting 3 posts this week.
What does RBA want to learn?
1️⃣ What, if any, are the emerging business models and use cases that a CBDC would support, that are not effectively supported by existing payments and settlement infrastructures in Australia?
2️⃣ What might be the potential economic benefits of issuing a CBDC in Australia?
3️⃣ What operational, technology, policy and regulatory issues might need to be addressed in the operation of a CBDC in Australia?
I’m glad that RBA is taking a second look at CBDCs! This doesn’t necessarily mean that they will build one, but it will show them what innovators can do with a CBDC if they had one. A fundamental question because central banks are clueless!
The pilot will run on Ethereum which has already led some to claim that the RBA is going to build its CBDC on blockchain! While this is true:
“The DFCRC will develop and install the eAUD platform as a private, permissioned Ethereum (Quorum) implementation. The eAUD ledger will operate as a centralised platform, under the management and oversight of the RBA.”
The RBA is clear that this is just a trial platform so claims that the RBA is building their CBDC on Ethereum are simply wrong:
“The choice of technology for this project does not reflect any view that any eventual CBDC would be blockchain-based or that Ethereum would necessarily be an appropriate choice for a production system. Rather, it was chosen as a widely used and well-understood platform that would facilitate participation in the project by a wide range of entities.”
One thing to watch is that the RBA has KYC data holders completely separate from the RBA’s systems. The only way the digital euro/dollar or eAUD can maintain public trust is to simply not hold personal information from the start.
Takeaways:
This is a wonderful project and a great trial! RBA is asking innovators: “Hey if we build this what could you do with it?”
It shows a fair amount of humility. That RBA is willing to take a second look is impressive.
RBA building on Ethereum is fantastic because it will give the crypto community the opportunity to show what they could do with the eAUD.
I predict that innovators will make a compelling case for the eAUD!
The RBA will eventually admit: “We never thought of that.”
Thanks for reading!
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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