September 25, 2023 7:26 pm

First Mover Asia: Hong Kong Isn’t Sure if It Needs a CBDC


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First Mover Asia: Hong Kong Isn’t Sure if It Needs a CBDC

By Sam Reynolds, Damanick Dantes, James Rubin

The issues that have prompted other countries to explore a central bank digital currency don’t exist to the same extent in Hong Kong; bitcoin continues its mini-upswing.

Prices: Bitcoin and ether rise again; other major cryptos are mostly in the green.

Insights: Hong Kong wrestles with the need for a central bank digital currency.

Technician’s take: BTC’s current price action is similar to what occurred in 2018-2019.


Bitcoin (BTC): $39,768 +1.4%

Ether (ETH): $2,923 +1.2%

Top Gainers

Asset Ticker Returns Sector
Algorand ALGO +4.1% Smart Contract Platform
Litecoin LTC +2.7% Currency
EOS EOS +2.6% Smart Contract Platform

Top Losers

Asset Ticker Returns Sector
Cosmos ATOM −4.3% Smart Contract Platform
Polygon MATIC −2.0% Smart Contract Platform
Dogecoin DOGE −1.9% Currency

Bitcoin, ether increase for a second consecutive day

Bitcoin’s price rose for a second consecutive day. But the surge seemed more a temporary aberration than the promise of better times ahead. The same conditions that have been weighing upon the crypto market over the past two months continue. No surprise the Commerce Department said the U.S. economy had shrunk during the first quarter.

Early Thursday, the largest cryptocurrency by market capitalization passed $40,000, the price midpoint during the last three months, and was more recently trading at about $39,750, up about 1.5% over the past 24 hours. Ether, the second-largest crypto by market cap, was changing hands at about $2,920, a roughly 1.2% increase over the same period.

Bitcoin at $40,000 “is an important level,” wrote Joe DiPasquale, the CEO of fund manager BitBull Capital. Yet, DiPasquale noted, the news wasn’t surprising because $2 billion in bitcoin options will expire on Deribit “with a maximum pain value” at the current $40,000 level.

“We can expect volatility after [Friday’s] expiry, and the real level bulls still want to see reclaimed is $42,000,” he wrote.

Other major cryptocurrencies were largely in the green, albeit not by much. TGH and ALGO were among the winners, with the former rising about 5% at one point and the latter over 2.5%. Trading was light and volatility remained muted as investors continue to watch events in Ukraine, tightening monetary policy aimed to curb inflation and unsettling economic data.

The paths of bitcoin and ether on Thursday tracked equity markets, which also rose for a second consecutive day and more robustly than Wednesday’s microscopic gains. The Nasdaq jumped a hearty 3%, while the S&P 500 and Dow Jones Industrial Average were up roughly 2% each.

Tech Investors were apparently buoyed by Meta’s (FB) report that it had increased users, sending the company’s shares up more than 17%, while Apple (AAPL) notched better-than-expected results.

Still, other news was less promising. Amazon (AMZN) reported its first loss since 2015 while the Commerce Department announced that gross domestic product had declined to 1.4% annualized.

But the nature of the contraction will determine its impact on crypto markets, wrote Mark Lurie, the founder and CEO of Shipyard Software, a provider of crypto trading software.

“It depends on how the U.S. economy contracts,” Lurie wrote. “If it’s because of interest rate raises, that may dampen crypto market cap growth. Many investors have chased yields in crypto because interest rates returned so little; if they rise it may decrease the motivation to chase yields and thus to allocate to crypto.”

“However, if the economy contracts and inflation drops, then interest rates will probably remain as is, in which case crypto will benefit.”


S&P 500: 4,287 +2.2%

DJIA: 33,916 +1.8%

Nasdaq: 12,871 +3.0%

Gold: $1,894 +0.4%


Hong Kong’s uncertainty about a CBDC

The Hong Kong Monetary Authority (HKMA), the Chinese Special Territory’s central bank, published a policy paper this week outlining the possible directions a Hong Kong-issued central bank digital currency (CBDC), which it’s calling an e-HKD, could take.

CBDCs, a digital version of cash issued by central banks as opposed to money issued by commercial banks, has been explored by central banks worldwide, including Sweden, the Bahamas and Canada. But most critically for Hong Kong, its largest trading partner, China, has developed and is slowly deploying its own CBDC, called the e-CNY.

Each region has its own reasons for deploying a CBDC. In Sweden bankers are concerned about the declining use of cash; in the Bahamas the government looks to build out a system for financial inclusion; Canada’s central bank sees the need for increased competition for retail deposits; while the People’s Bank of China wants to wrestle away the control AliPay and WeChat pay have over the nation’s money supply.

All these issues brought up by other governments exist to some extent in Hong Kong. But HKMA’s assessment is that these issues don’t exist to the point of warranting the introduction of a retail-focused CBDC (which it calls a rCBDC in the paper).

“Although rCBDC is meant to be a digital extension of cash, its potential demand is highly uncertain,” the HKMA wrote. “The potential holders may need to switch funds out of their deposit accounts for rCBDC, which would affect the balance sheets of commercial banks and lead to disintermediation of banks.”

The HKMA’s analysis shows potential for a squeeze on banks’ interest margins and profitability because deposits will decline as consumers swap out bank deposits for an rCBDC where deposits are stored, with the central bank potentially adding costs (ironically) for consumers.

“Banks may also opt to pass the higher funding cost to their customers by imposing a higher lending spread,” the HKMA noted. “In the remote case where the increase in funding cost and lending spread lead to a tightening in overall credit conditions, consumption and investment activities would inevitably be affected.”

The HKMA doesn’t see this as a scenario that is likely to play out because it’s likely that an rCBDC would be unremunerated – meaning it would be without an incentive structure in place like negative interest rates.

“The attractiveness of e-HKD as a store of value over bank deposits should also be limited, and hence the bank disintermediation risk should be manageable,” the HKMA said.

On the customer-facing side, the HKMA isn’t exactly sure what pain points the rCBDC would address. Hong Kong, it said, already has a “plethora of convenient retail payment options available” that are resilient and highly efficient. Mass adoption will only happen if there’s an obvious pain point that this solves.

This existential question of why a CBDC is really necessary has been brought up by central bankers before, in many of the countries that have explored the technology.

While consulting groups like Accenture (ACN) and their lackeys might produce white paper upon white paper extolling the virtues of the technology, it remains unclear if it’s still a necessity.

A Bank of Canada research paper on the topic found there may be marginal theoretical gains from welfare distribution via CBDC, but the public’s perception of the platform’s net benefit remains a challenge.

Speaking on the topic in 2021, U.S. Federal Reserve chair Jerome Powell came out as a skeptic about its necessity.

“The real threshold question, for us, does the public want or need a new digital form of central bank money to complement what is already a highly efficient, reliable and innovative payments system?” he said at the time.

Technician’s take

Bitcoin Holding Support; Resistance at $43K

Bitcoin daily chart shows support/resistance, with RSI on bottom. (Damanick Dantes/CoinDesk, TradingView)

Bitcoin (BTC) remains in a tight trading range with support at $37,500 and initial resistance at $43,000.

The cryptocurrency was trading around $39,000 at press time and is down 2% over the past week. BTC appears to be stabilizing on intraday charts, although upside could be limited into the Asia trading day.

Momentum signals have weakened over the past week, which typically precedes a period of flat to negative price action. For now, buyers have kept prices anchored around the $40,000 price level, albeit unwilling to decisively break above the $46,710 resistance level over the past three months.

A negative reading on weekly momentum indicators is on watch, which could increase the chance of a price breakdown.

Still, BTC is a few days away from registering a bullish countertrend signal, per the DeMARK indicators, which could delay the formation of an intermediate-term downtrend.

The current price action is similar to what occurred in 2018 and 2019, which was a long period of choppy trading and relatively low returns, similar to equities. At that point, the bitcoin price range was roughly $6,000 to $9,000.

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