The Hong Kong Monetary Authority (HKMA) has unveiled a prototype two-tier central bank digital currency (CBDC) ecosystem that will enable end users to store digital HK dollars as either intermediated CBDC tokens or CBDC-backed stablecoins in a digital wallet and use them to carry out retail transactions.
The platform developed by the HKMA’s Project Aurum incorporates both a wholesale interbank system for the issuance of digital HK dollars to commercial banks and a retail e-wallet system for circulating the CBDC among end users, and is the first such project globally to explore the use of stablecoins within a CBDC infrastructure.
The wholesale interbank system will be built on blockchain technology, while the retail e-wallet system will be server based and operated by participating banks, according to the HKMA.
“Each bank, regardless of whether it is an issuing bank or non-issuing bank, implements and operates its own retail e-wallet system. Its customers, ie the end-users, interact with the bank server through this e-wallet system,” the HKMA explains in its project report for the Bank for International Settlements Innovation Hub.
“The customer conducts all e-wallet activities, eg payment, through his/her bank.”
The retail e-wallet system will also enable an end-user to “withdraw fiat from his/her savings account and deposit the equivalent amount into his/her e-wallet account in the form of the CBDC-token or the CBDC-backed stablecoin and vice versa”, to make and receive payments in the e-wallet currency and “to process a request to trace the UTXO [unspent transaction output] history of the e-wallet currency”.
“Project Aurum was initiated to develop a working prototype that would serve as a public good for the central banking community,” the HKMA says.
“Adhering to the principles of safety, flexibility and privacy, Project Aurum has developed a two-tier rCBDC system comprising a wholesale interbank system and an e-wallet system, in which the validator mechanism helps prevent over-issuance and double-spending.
“Project Aurum has made a number of ground-breaking achievements. First, it has implemented two types of rCBDC architecture, intermediated CBDC and CBDC-backed stablecoins after considering trade-offs among different CBDC architectures.
“Second, the use of UTXO enables the traceability of the tokens to the backing assets, therefore providing safety to end-users in the case of commercial bank bankruptcy.
“Third, the two-tier architecture provides additional privacy for the end-users as the interbank system does not record any personal data.
“Lastly, the decoupling of the wholesale and e-wallet systems strengthens the cyber resilience based on the principle of privilege separation and network segmentation, by minimising the interactions between retail and wholesale activities.”