The move to digital currency – what you need to know about the future e-HKD and its legal implications
Introduction
The Hong Kong Monetary Authority (the “HKMA”) announced in June 2021 its
“Fintech 2025” strategy for driving the fintech development of Hong Kong. As
one of its strategic directions, the HKMA has commenced a study on the prospect
of issuing retail Central Bank Digital Currency (“rCBDC”) in Hong Kong i.e. e-HKD, and has carried out two rounds of
market consultation on the subject. On 20 September 2022, the HKMA published a
positional paper “e-HKD – Charting the Next Steps”, summarizing the response to the earlier market consultations and setting
out the initial views of the HKMA on the future development of e-HKD.
Various legal
issues will arise in the development of e-HKD, including its legal status,
privacy and data protection, compliance with AML/CFT requirements and
cross-border transactions with other CBDCs. This article summarizes the legal
issues involved in the future development of e-HKD, including the suggestions
given in the response and the stance of the HKMA on these issues.
Legal
status of e-HKD
The HKMA states that the legal mandate
underpinning the status of any e-HKD, as essentially digital version of Hong
Kong dollar cash, should align with that of existing Hong Kong currency/bank
notes (issued under the Legal Tender Notes Issuance Ordinance, Cap 65) and
coins (issued under the Coinage Ordinance, Cap 454).
The HKMA further preliminarily opines that
e-HKD shall have the status as legal tender, in light of the vision that e-HKD
shall be the digital equivalent of existing HKD fiat currency. A legal tender
status means that absent any contractual term to the contrary, e-HKD as legal
tender, would by law be regarded as a valid and legal means of tendering
payment for an incurred debt.
A point to note is that in a commercial
transaction, parties can always contractually determine for themselves what
terms upon which they will transact, including what means of payment they will
accept. Accordingly, as is the case presently with bank notes and coins, the
law would not compel parties to accept e-HKD despite its future status as legal
tender.
To implement the above ideas, amendment of
the existing ordinances, the consolidation of all existing currency-related
ordinances or enactment of a new stand-alone ordinance to include all
provisions relating to e-HKD are all possible options to be implemented.
Further, alongside with introducing the
e-HKD as legal tender, technology-based measures and criminal law protection
should be introduced to secure the authenticity of and restrict any
“double-spending” of e-HKD.
Privacy
and data protection
The HKMA recognizes the importance of
privacy and data protection in planning the e-HKD arrangement. In order for
e-HKD to be generally accepted and used by the public, the consideration of
privacy and data protection should be embedded in the system design and
operation of e-HKD. In particular, the e-HKD system should at all times comply
with the Personal Data (Privacy) Ordinance (Cap 486) and relevant codes of
practice, guidelines and best practices issued by the Office of the Privacy
Commissioner for Personal Data from time to time.
Two key aspects of e-HKD’s system design
and operation would affect the privacy and data protection of e-HKD. The first is whether it should be token-based
or account-based. The token-based approach would rely on the ability of the
payee to verify the validity of the payment object. This could allow more
anonymity in payments between different parties (e.g. customers, merchants) and
such privacy could protect against abuse of individual data by commercial
entities, but at the same time may risk facilitating illegal activities. The
account-based approach would require the recording of balances and transactions
of e-HKD holders. This approach would rely on the ability to verify the
identity of the account holder, and could help comply with AML/CFT
requirements.
Nonetheless, either token-based or
account-based approaches could be structured to trace users, as both are in
digital forms and require a ledger. Hence, another aspect is what parties
should have access to what degree of information such as user identity,
transaction history, in particular the degree of anonymity vis-à-vis the
central bank.
To maintain anonymity vis-à-vis the
central bank and for other potential benefits, the HKMA in its technical
whitepaper states that it prefers a two-tier rCBDCs model. In this model, the
central bank focuses on maintaining the core and foundational infrastructure of
e-HKD, guaranteeing the stability of its value and overseeing the system’s
security. Majority of operational tasks and consumer-facing activities can be
delegated to private sector intermediaries. The private sector intermediaries
are also responsible for keeping detailed records of retail transactions and
balances. If a high level of privacy protection is to be accorded to the e-HKD
arrangements, those records may not be shared with the central bank.
However, this arrangement is not without
drawbacks. Should an intermediary become insolvent, the central bank could lack
information to honour claims on the e-HKD itself or as the backing assets from
the general public.
Balancing
the need for data protection and AML/CFT control
Another
undesirable consequence for complete anonymity is the central bank’s inability
to fulfil its responsibilities in ensuring that e-HKDs transactions comply with
AML/CFT requirements and guarding against illicit transactions and tax evasion.
In short, AML/CFT requirements mean the
requirements to comply with the relevant Anti-Money Laundering and
Counter-Financing of Terrorism provisions in Hong Kong that include customer
due diligence (checking and verifying identities; checking source of funds and
wealth; keeping records etc).
There is a need to strike a balance between personal data protection and
AML/CFT control. One suggestion is to adopt a tiered wallet approach. Under
this approach, a greater degree of anonymity is allowed for wallets with a
lower maximum holding and transaction limit.
One example is e-CNY, which follows the principle of “anonymity for
small value and traceable for high value”. The People’s Bank of China has come
up with a tiered design of e-CNY wallet with different caps on transactions and
balances for different types of e-CNY wallets. The lowest-tier wallet has lower
transaction and balance caps but users are able to make payments in an
anonymous manner. The upper-tier wallets have higher transaction and balance
caps but require the registration of a Chinese identity card to ensure
compliance with AML/CFT requirements.
From the positional paper and the earlier consultation, it can be
observed that the HKMA does not prefer complete anonymity for e-HKD in the
future. A tiered wallet approach may be implemented in the future.
Cross-border
transactions
The HKMA states that currency, including e-HKD, legally issued in one
jurisdiction should normally be recognized in other jurisdictions. Hence,
issues related to cross-border transactions of e-HKD should be similar to those
encountered with existing cross-border transfers.
Nevertheless, new issues may arise, including potential restrictions or
limits placed in other jurisdictions on holding of CBDCs or markedly different
data protection laws between jurisdictions. These and other issues will emerge
as the market develops, will merit further consideration and discussion with
stakeholders.
Conclusion
The development of
e-HKD is still in a pre-mature stage and many details are yet to be confirmed. However,
such development will bring a tremendous impact and numerous business
opportunities to Hong Kong, so it is better to approach and understand it in an
early stage to prepare for the future reform. We understand that compliance and
legal considerations in relation to a newly developed financial technology
might be too complicated to understand, it is advised that business should seek
professional and legal advice to understand more about the legal issues
involved in those areas.
For enquiries,
please feel free to contact us at: |
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Place, Central, Hong Kong |
Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2022 |