If Only Digital Cash Worked In Hong Kong Taxis

(Bloomberg Opinion) -- The Hong Kong dollar is very likely to go digital. Major deposit-taking institutions, as well as payment firms like Visa Inc., Mastercard Inc. and Ant Group Co.'s Alipay, have all run pilots around e-HKD, a paperless version of the city's currency. Everyone is optimistic.

But the e-HKD pilot — or at least its first phase, whose results were reported by the Hong Kong Monetary Authority this week — didn't cover that one utility everyone is waiting for: cashless payments for taxi rides. For visitors, it can be a little bewildering that most cabbies in this bustling, modern financial center only accept physical currency. For residents, it's a constant pain point.

Almost every other aspect of daily life is now cashless. The Octopus card, which helped people cope with a coin shortage during the former British colony's 1997 handover to China, is now an efficient digital wallet as well. Multiple rounds of handouts from the government since the 2020 outbreak of Covid-19 have boosted people's familiarity with online payments. Nobody with a bank account needs to go to a 7-Eleven any more to settle utility bills: The so-called Faster Payment System allows bank accounts to be debited instantaneously by scanning QR codes or selecting the payee's mobile number. 

In these aspects, Hong Kong is like any major metropolis. So how will a central bank digital currency add value to the retail payment landscape?

All of this is still hypothetical. Authorities are yet to decide whether or when they will issue a CBDC. The central bank has only recently set up a group to study privacy protection, cybersecurity and interoperability. Still, purely on the basis of what banks and fintech have come up with so far, it doesn't look like the case is overwhelmingly strong. Singapore has decided that there is no compelling reason for it to join the retail CBDC craze for now. It is readying itself for a future in which interbank clearing and settlements are on the blockchain. Amid soaring global interest rates, helping institutions reduce intraday liquidity costs may be more useful than giving individuals a new payment option they won't really use — at least, not every day.

Financial institutions and fintech in Hong Kong seem to think otherwise. For them, the proposed e-HKD's appeal lies in its ability to handle complexity at scale. Some of the Phase 1 pilots experimented with a programmable currency responding to self-executing computer code, while others explored those rare situations where there is no internet connection. A third type of trials focused on a new way to take out home loans, a fourth emphasized using the Hong Kong dollar in other blockchain transactions, such as buying nonfungible tokens. HSBC Holdings Plc, the island's biggest bank, teamed up with Visa to gauge the prospect for tokenizing deposits. 

Some of these innovations have high practical utility. In a city of prohibitive homeownership costs, people will welcome an e-HKD loan that helps with a part of their upfront payment burden, including stamp duties. Smart contracts can tie down e-HKD to specific uses, so that lenders will have the assurance that unsecured credit is being used for the right purpose.

Small merchants might also benefit. Take the case of neighborhood spas. They offer hefty discounts against lump-sum advance payments that get drawn down over time. But these are small businesses that can go bankrupt at any time. If an e-HKD advance stayed in an escrow account, the merchant would know it is there and the customer would see the unspent balance as her money until she signs the invoice for the next pedicure.

It is also possible that e-HKD will have a second layer of embedded programming. The spa would pledge its e-HKD advance against a cheap working-capital loan from a bank. The customer would still enjoy a discount, but without supplying liquidity to the business. 

Still, in evaluating tokenized money, the HKMA should ask just one question: “Will our cabbies accept it?” A currency issuer won't want to confuse the public with an upgrade that comes up short on the original, especially since the existing Hong Kong dollar is a success no authority will want to trifle with. Standard Chartered Plc and HSBC have been putting banknotes in circulation since 1862 and 1865, respectively. Bank of China (Hong Kong) Ltd. joined them in 1994. The city has held the value of the local tender at 7.8 to the dollar for 40 years. 

HSBC has run a pilot to see if a central bank digital currency would serve as full-fledged alternative to cash and credit cards. But nothing in Hong Kong will ever be a real competitor to paper money without a thumbs-up from the drivers. Octopus cards have made an inroad into the taxi market, but it doesn't go deep enough. A senior executive visiting from Singapore was reminded by her partner to change money at the airport. The irony is that she is in town for the Hong Kong Fintech Week.

If e-HKD turns out to be useful only to crypto bros — for them to buy and sell Bitcoin or images of bored-looking apes — then pursuing it is really not a good use of HKMA's time and effort. But if it works in taxis, it should be allowed to hit the road.

More from Bloomberg Opinion:

• Hong Kong Is Asia's New Crypto Capital: Andy Mukherjee
• Crypto Bros Have the Fix for a $1 Trillion Problem: Tim Culpan
• Matt Levine's Money Stuff: When Is a Token Not a Security?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

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