Given that most of the retail transactions have already been moving away from paper currencies and being replaced by digital payments organized by commercial entities, the role of digital currency issued by central banks in retail payments is expected to be quite limited, the real testing ground is likely for digital currencies issued by central banks being used for interbank payments. TMA is delighted to have invited Mr Esmond LEE, CEO, Euroclear Bank Hong Kong Branch, to discuss with Members the latest development of digital currency with following synopsis:

1.  Digital currencies issued by central banks are usually fungible with paper currencies and their conversion rate is 1:1. However digital currencies differ from paper currencies in one important aspect: cost of handling and also cost of acquisition for digital currencies are much lower than paper currencies. Paper currencies had never been used for interbank payment because of the prohibitively high handling cost. Digital currencies’ potential usage in interbank payments can be facilitated by cheap or even nil handling cost.

2.  Zero cost of handling is only a necessary but not sufficient condition for digital currencies to be used for interbank payment. Availability is even more important and can be regarded as a decisive factor for digital currencies to be used for interbank payments. As digital currencies are often regarded as M0 (M Zero) i.e. the high powered money, M0 may not be too readily available in the money market. Nonetheless if the digital currencies are regarded as non-interest bearing bills which can be used as collateral for borrowing, the velocity of circulation of the digital currency may be faster to compensate for its somewhat limited availability. 

3.  If digital currencies is used for interbank payment they are likely to be transmitted on a dedicated platform of the respective digital currency.

4.  Types of interbank payments using digital currencies will cover both single leg payments and payments relating to exchange of equal value such as DvP (delivery versus payment) and PvP (payment versus payment).

5.  Using digital currencies issued by central bank to settle capital market transactions will facilitate market surveillance by central banks as the logistics of the digital currencies are transparent to the respective central bank issuing that currency. This may also help the central bank to relax its controls on the financial products and rely instead on the surveillance of the movements of the digital currency issued by the relevant central bank.  

Mr Esmond LEE

CEO
Euroclear Bank Hong Kong Branch

Before joining the FSDC, Mr. Lee served as the Executive Director in charge of the Financial Infrastructure Department at the Hong Kong Monetary Authority (HKMA) from 1 February 2008 to 7 August 2016. Mr. Lee has played a key role in the development and operation of the financial infrastructure, especially clearing and settlement systems, in Hong Kong since joining the HKMA in 1993. He served as Chief Representative in the HKMA's New York Office from 1998 to 2000.

Mr. Lee got a Master of Arts in Comparative Asian Studies in 1991 and a Bachelor of Social Sciences in Economics and Management Studies in 1978, both from University of Hong Kong; and a Master of Laws in Arbitration and Dispute Resolution from City University of Hong Kong in 2017.