Three benefits of using digital currency to disburse cash handouts
Authors: Stephen Wong, LegCo Member, Senior Vice President and Executive Director of Public Policy Institute, and Judy Chen, Senior Researcher, Our Hong Kong Foundation
The 2022-2023 Budget just announced a new round of consumption voucher scheme, under which electronic consumption vouchers with a total value of $10,000 will be disbursed by instalment to each eligible Hong Kong permanent resident. Other than the current electronic payment platforms used to distribute the electronic consumption vouchers, the government should consider the major financial innovation that has developed rapidly since then: the Central Bank Digital Currency (CBDC).
CBDC is fiat money issued digitally by central banks. Currently, 86% of central banks in the world are conducting research on CBDCs. The Mainland’s digital yuan, or e-CNY, is leading the pack in this trend; meanwhile the US Federal Reserve has also taken the first step towards developing a CBDC by releasing a public consultation document on digital US dollars at the end of January.
As an international financial centre, Hong Kong is not far behind in the development of a CBDC. The Hong Kong Monetary Authority (HKMA) released two consecutive CBDC research papers at the end of last year. The Chief Executive of HKMA also said recently that HKMA would explore the possibility of linking the wholesale CBDC cross-border payment platform “mBridge” and the blockchain-based trade finance platform “eTradeConnect”, marking an important step taken in exploring the application scenarios of wholesale CBDC. On the other hand, what are the application scenarios of retail CBDC (e-HKD)? The distribution of consumption vouchers would be an excellent use case to fully demonstrate the technical advantages of e-HKD.
Shorten the time gap between policy formulation and implementation of electronic consumption vouchers
CBDC will significantly shorten the internal preparation time before the vouchers are released. CBDC is programmable, that is, CBDC can be programmed to set specific rules of use, such as setting issuing CBDC vouchers that can only be used for consumption purposes before a built-in expiry date. Compared with the traditional consumption vouchers, CBDC will greatly reduce the technical complexity of voucher design and reduce the time gap between policy formulation and implementation. Besides, the Consumer Council received hundreds of complaints related to consumption vouchers last year, including merchants setting their own minimum spending levels and inconsistencies in refund arrangements. With the precise rules of CBDC consumption vouchers programmed, such violations can be avoided to a large extent.
Additionally, CBDC can speed up the distribution of consumption vouchers. In last year's case, citizens had to provide personal information, identity authentication, indicate their collection account, amongst additional procedures at the time of the registration. Only after review, can they receive the first batch of electronic consumption vouchers, which came nearly a month after registration. It is also not uncommon that members of the public fill in the wrong information and are unable to receive the consumption vouchers. CBDC can significantly optimise this process. The CBDC system can be connected to the "iAM Smart" digital personal identity system. From then on, by simply applying through the "iAM Smart" system with a single click of a button, the public can complete the aforementioned procedures as well as others in one go. After that, the electronic system will automatically verify the information, thus saving time from relevant government departments having to manually review the applications. In summary, CBDC can simplify the application process, automate government reviews, and enable quick and accurate disbursement of the consumption vouchers.
There are numerous mediums that can facilitate CBDC payments. In addition to traditional mobile phones, CBDC can also be used via wearable devices (such as smart bracelets), smart cards, amongst additional methods that are convenient for citizens. Citizens can choose the payment medium based on their own preferences. The diversification of payment medium also means that CBDC consumption vouchers have another important feature: allowing for offline payments, meaning that payment can happen without online networks, which will undoubtedly ease the use of consumption vouchers in a wider range of scenarios, particularly for the elderly.
It is worth mentioning that last year's consumption vouchers were disbursed in instalments, and the distribution date and amount of each instalment depended on different factors such as the registration date, payment platform, and the completion date of eligible consumption. Many citizens were confused by such complicated distribution rules, and CBDC can help solve this problem. By combining programming and smart contract functions, CBDC consumption vouchers can set the preconditions for the distribution of each instalment. When personal consumption meets these conditions, it will automatically trigger the program to disburse the next instalment of consumption vouchers. In this way, members of the public will not be baffled by the complex instalment-based disbursement schedule. The sooner they complete the qualifying consumption, the earlier they can receive the next instalment of consumption vouchers, which is conducive to encouraging consumption and promoting economic development. Automating the instalment-based disbursement process can also reduce the administrative costs of the government.
Promote the long-term development of electronic payments
To conclude, CBDC offers a fast and accurate way to distribute government handouts by streamlining the entire process from consumption voucher design and preparation to the use of the vouchers. Of course, distributing government handouts is only a single short-term application scenario. In the long run, CBDC can be used to distribute other social benefits and therefore it has long lasting significance.
Over the past year, consumption vouchers have not only played an important role in boosting the local economy but has also promoted the development of the local electronic payment market. CBDC is an important trend in the future development of the electronic payment market. The government should seize the opportunity to promote the use of CBDC in practical scenarios such as the Consumption Voucher Scheme, take the lead in the development of electronic payment systems, and lay a solid foundation for Hong Kong to develop itself into a digital financial centre.