On 4 December 2020 the Hong Kong Monetary Authority (HKMA) announced that it is collaborating with the Digital Currency Institute of People's Bank of China (PBOC) in a pilot testing scheme for using China's sovereign digital currency and electronic payment (DC/EP) for cross-border payments. The use of the digital currency will offer customers an additional cross-border payment option as the sovereign digital currency will soon enjoy the same status as cash in mainland China. This article will look at what DC/EP is, explain how it works and how it compares to other digital payment products in the market, and what this collaboration means for payments in Hong Kong.

The legal framework for China's digital currency was published by People's Bank of China (PBOC) in October 2020 through the PRC Law of PBOC (Amended Draft for Public Opinion) (the Draft). The Draft, once enacted, will legalize a digital form of renminbi (RMB) as an alternative legal tender in Mainland China.

PBOC, as the issuer of Digital Currency Electronic Payment (DC/EP), will adopt a "one currency, two bank libraries and three centers" structure (DC/EP Structure) to manage, record, and analyze DC/EP and DC/EP-based transactions. Distributed ledger technology (DLT) might be one technology used for such DC/EP structure, but the exact role of DLT remains unclear at this point as the DC/EP structure is not decentralized. As a result, the DC/EP user can only enjoy limited anonymity as DC/EP is technically traceable. PBOC will also adopt a two-tier DC/EP distribution system: first being distributed to banks and other designated financial institutions (including payment institution) and then further being distributed by such intermediaries to the end users.

What is DC/EP?

How does the DC/EP work?

Characteristics of DC/EP

Why PBOC is launching DC/EP?

  
Design of DC/EP System

Distribution of DC/EP

Recent developments

What this means for payments in Hong Kong?