Late last month, Hong Kong began a second round of pilot programs for e-HKD, a much-awaited electronic version of the island’s banknotes.
The monetary authority also tweaked the name of the project to e-HKD+, a timely acknowledgement that when it comes to giving the city’s residents a new payment option, a central bank digital currency, or CBDC, isn’t the only worthwhile goal. Bank deposits could be tokenised, too.
That’s also the direction that Singapore, which decided in 2021 to sit out the global craze for retail CBDCs, has taken with its Project Orchid. The rival Asian financial centres’ experiments with programmable deposits on the blockchain may help set a global trend. From rewarding environment-friendly spending and channeling government grants to deserving beneficiaries, money will do more than just grease commerce.
CBDCs work like paperless ATMs. Once you decide the withdrawal amount, the e-wallet on your smartphone gives you spending power that is no longer the liability of the institution where you keep your savings, but that of the central bank. If CBDCs become wildly popular, banks could lose a big chunk of customers’ funds and may have to curb lending.
The solution could be to put caps. Rough calculations by Katrin Assenmacher, the head of stress test modeling at the European Central Bank, and other researchers suggest that a limit close to 3,000 euros ($4,294.07) per person would be effective in managing excess demand in the euro area.
It’s equally possible, however, that this brand-new payment instrument would struggle to find early adopters. While the Chinese government is paying some employees at state-owned enterprises with e-CNY, most are converting it to cash immediately, according to a South China Morning Post report in May.
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Deposit tokens won’t feel very different to users of mobile-payment apps. Nor will they threaten financial stability. When a buyer takes out US$10 ($14.31) from her Wells Fargo & deposit and spends the token, the money will reappear as US$10 in the seller’s e-wallet. It’s when the seller decides to swipe the balance into a Citigroup account that Wells Fargo’s liability will end, and Citi’s will begin.
Even if all the funds held in savings and current accounts are converted into their cryptographic equivalents, there will be no change in the banking system’s liabilities or assets.
Money will move faster over the blockchain, particularly for cross-border transfers that often require a string of correspondent banks. Fees will fall, from nearly US$13 on a US$200 remittance at present.
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A bigger advantage will come from smart contracts, self-executing software code capable of putting all sorts of conditions around when a payment will be triggered and to whom. DBS Group Holdings, Singapore’s largest lender, has used distributed ledger technology in a pilot program to streamline government grants to businesses. Once smart contracts verify that the conditions for payments have been met, cash is automatically disbursed.
In Hong Kong, DBS is working on a project that will allow companies to reward their customers for low-carbon lifestyles with hypothetical e-HKD that can only be spent for buying green products. However, purpose-bound loyalty programs don’t have to wait for central banks to issue CBDCs. They will run just as well with tokenised deposits.
Hang Seng Bank, a subsidiary of HSBC Holdings, will test if digital money can become the building block of a rewards platform that is open, efficient and scalable, the Hong Kong Monetary Authority announced last month.
Bank deposits account for more than 90% of the world’s money in circulation. Even if a small chunk of them gets tokenised, it will be a big innovation — and not just in Asia. Just last week, BBVA, Spain’s second-largest lender, announced that it will be one of the first users of Visa’s new tokenised asset platform.
Deposit coins will enjoy the insurance that governments around the world provide to small savers. For an average individual, a US$10 token in her wallet will always be exactly that, regardless of the bank that issued it.
Deposit tokens already have competition. Stablecoins also promise parity with central bank money. But to make good on that pledge, the likes of Tether Holdings’s USDT, the dominant player in the US$174 billion market, and its rival, Circle Internet Financial’s USD Coin, or USDC, need to support all of their liabilities with liquid collateral, such as cash and government bonds.
Tokenised deposits at well-capitalised banks won’t require 1:1 backing, leaving more of the world’s limited supply of safe assets free for productive uses.
Tokenised deposits may, therefore, be economically more efficient than stablecoins. Since they won’t change hands as bearer instruments, they should also be less risky than cryptocurrencies that lose billions of dollars every year to theft. If smart contracts can also make the coins socially beneficial, then more central banks might emulate Singapore and skip retail CBDCs.
Or, they might put those plans on hold, as Bank of Canada did recently. For now, private money that serves a public purpose should be good enough.
