Months after completing phase 1 of its central bank digital currency (CBDC) pilot, Hong Kong is set to begin the second phase of experiments before a commercial rollout in 2025.

In a disclosure, the Hong Kong Monetary Authority (HKMA) said the new iteration of the e-HKD is intended to explore new use cases for the CBDC in both retail and wholesale verticals.

The HKMA will focus its bulk of attention on programmability and tokenization capabilities, with pundits predicting novel functionalities. The central bank says it is open to receiving submissions for innovative use cases from financial service providers and blockchain firms.

“Building on the success and experience of Phase 1, the next phase will delve deeper into select pilots from Phase 1 where an e-HKD could add unique value, namely programmability, tokenisation and atomic settlement, as well as explore new use cases that have not been covered in the previous phase,” read the HKMA’s report.

The HKMA says it will operate an agnostic model, selecting submissions based on the merits of their applications. The HKMA will prioritize proposed use cases that “differ significantly” from existing solutions but will have to be “customer-centric” in nature.

Furthermore, the CBDC use cases should be readily tested with the same set of participants deployed in Phase 1 and should be compliant with existing regulatory standards. Solutions keen to cut are expected to be “Hong Kong-centric” and designed to promote the use of the e-HKD in retail applications.

Firms seeking to participate in the CBDC pilot have until May 17, 2024, to submit their applications to the HKMA for consideration. Despite the focus on novel use cases, entities participating in the first phase are encouraged to submit proposals linked to further testing their use cases.

In the first iteration of the e-HKD pilot, the HKMA explored the concept of offline payments, tokenized deposits, cross-border payments, and settlement of tokenized asset transactions with varying degrees of success.

“The HKMA recognises that these pilots are conducted on a small scale under a controlled environment,” the HKMA said in October. “Further investigation and evaluation are required to determine if these benefits can be realised at a larger scale in real-life applications.”

Expert group for CBDC

In late 2023, Hong Kong’s authorities established a CBDC expert group to spearhead the development of a CBDC to compete favorably with existing payment options.

The group, comprising experts from business, law, economics, and IT, has been saddled with the task of determining the policy and technical direction of the CBDC pilot. Despite the diversity of use cases, the expert group says it will proceed with a cautious approach focused on retail functionalities.

There are plans to hasten the development of a wholesale CBDC in Hong Kong to improve the state of the “tokenization market” via a separate pilot study dubbed Project Ensemble.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: CBDCs are more than just digital money

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