Second iteration of cross-border CBDC pilot between China, Hong Kong falters

Consumer complaints have begun to strain Hong Kong’s efforts to explore the implementation of an international central bank digital currency (CBDC) payment system in collaboration with China. The plan, which has been in progress since 2020, aims to utilize China’s digital yuan for settling cross-border transactions between the two regions. However, according to a local publication called Sing Tao Daily, the project encountered several persistent issues during its second pilot phase, conducted in June.

During this phase, led by the Bank of China (Hong Kong) Limited, the focus was on conducting small high-frequency transactions in retail and restaurants using the digital yuan. Initially involving 500 retail participants, the group expanded to 2,100, with a specific emphasis on UBuy stores and the online retailer JD.com. Notably, prominent commercial banks in Hong Kong, such as Standard Chartered, HSBC, and Hang Seng Bank, also collaborated in this second iteration.

While the project demonstrated various positive aspects, certain shortcomings raised concerns about its future prospects. Consumers expressed dissatisfaction with the limited number of merchants accepting the digital yuan and the lack of technical expertise required to operate the system effectively.

According to one user, “It took the cashier about one and a half minutes to find a terminal under the counter that could collect digital RMB. It seems they are not very familiar with it, and when customers ask how to use the red envelopes, the cashier is not very clear.”

The target market for the cross-border functionality appears to be primarily aimed at tourists from Hong Kong visiting the Mainland. However, insiders suggest that the project will eventually expand to cover a broader range of use cases beyond just retail, transportation, and restaurants.

Both Hong Kong and China have been actively involved in various cross-border CBDC studies. In 2022, they participated in a collaborative effort with the Bank for International Settlements (BIS) mCBDC project. Previous reports have indicated China’s interest in exploring cross-border CBDC initiatives with Russia, while officials in Hong Kong have initiated talks with the United Arab Emirates.