Central Bank Digital Currencies and Hong Kong's e-HKD Initiative

Introduction

Central bank digital currencies (CBDCs) represent a fundamental evolution in the architecture of money. Unlike decentralised cryptocurrencies such as Bitcoin, a CBDC is a digital form of central bank money—a direct liability of the central bank issued in digital form and designed to function as legal tender.

Hong Kong, through the Hong Kong Monetary Authority (HKMA), has been at the forefront of CBDC exploration in Asia. The e-HKD initiative—Hong Kong's domestic retail CBDC project—has progressed through multiple phases of research and piloting, positioning Hong Kong as a serious participant in the global CBDC conversation. This article examines the e-HKD initiative, its legal and regulatory implications, and what financial institutions and businesses in Hong Kong should understand about this development.

The Global CBDC Landscape

According to the Bank for International Settlements (BIS), over 130 jurisdictions representing more than 98% of global GDP have explored or are actively developing CBDCs. Several jurisdictions have already launched retail CBDCs at scale, including China (the digital yuan or e-CNY), the Bahamas (the Sand Dollar), Nigeria (the eNaira), and Jamaica (JAM-DEX).

Major economies including the European Union (digital euro), the United Kingdom (digital pound), and the United States are at various stages of research, consultation, and pilot testing. The global momentum behind CBDCs reflects central bank interest in preserving the role of sovereign money in an increasingly digital payments landscape, reducing reliance on private payment intermediaries, and enhancing financial inclusion.

Hong Kong's e-HKD Initiative

Background

The HKMA launched its CBDC research in 2017 under Project LionRock, initially focused on wholesale CBDC applications for interbank settlement. In 2021, the HKMA published a discussion paper on e-HKD, outlining the policy rationale for a retail CBDC and soliciting public feedback on potential design and implementation issues.

In 2023, the HKMA launched Phase 1 of the e-HKD Pilot Programme, inviting selected financial institutions and technology companies to design and test use cases for a potential retail e-HKD in a sandboxed environment. Fourteen pilot projects were conducted across six categories: full-bank payments, programmable payments, offline payments, tokenised deposits, settlement of tokenised assets, and settlement of Web3 transactions.

Design Principles

The HKMA has indicated that an e-HKD, if issued, would likely:

• Be a liability of the HKMA (i.e., equivalent to physical banknotes and coins in terms of central bank backing)
• Be distributed through licensed intermediaries (banks and payment service providers) rather than directly by the HKMA
• Be interoperable with existing payment systems
• Preserve user privacy while enabling compliance with AML/CTF obligations
• Potentially incorporate programmability features (e.g., conditional payments and smart contract-based disbursements)

Programmability

One of the most distinctive features explored in the e-HKD pilots is programmability—the ability to embed conditions and rules into digital currency payments. Programmable payments could enable government welfare disbursements that can only be spent on specified categories of goods, automated corporate treasury management, and smart contract-based settlement in financial transactions. The legal implications of programmable money—including questions about when a payment obligation is discharged and how conditions can be embedded into legal tender—are significant and largely unresolved.

Legal and Regulatory Framework

Legal Tender Status

Under the Legal Tender Notes Issue Ordinance (Cap. 65), legal tender in Hong Kong consists of notes issued by authorised note-issuing banks (HSBC, Standard Chartered, and Bank of China (Hong Kong)) and coins issued by the Hong Kong Government. The HKMA is not itself a note-issuing bank.

For an e-HKD to constitute legal tender, legislative amendments would be required. The HKMA has indicated that the legal basis for issuing an e-HKD is among the key policy questions to be resolved before any launch decision is made.

Implications for Financial Institutions

Banks and payment service providers will play a critical role as intermediaries in any e-HKD distribution model. Financial institutions should monitor the HKMA's consultations and prepare for potential changes to their payment infrastructure, customer onboarding processes, and AML/CTF compliance frameworks.

The introduction of programmable e-HKD could have significant implications for bank deposit-taking if customers can hold e-HKD directly without routing through commercial bank deposits. Banks should assess the potential impact on their funding models and consider how their product and service offerings might need to evolve.

Cross-Border Dimension

Hong Kong has participated actively in multi-CBDC (mCBDC) research, notably through Project mBridge—a collaboration between the HKMA, the People's Bank of China, the Bank of Thailand, the Central Bank of the UAE, and the BIS Innovation Hub. mBridge aims to develop a shared platform for real-time cross-border payments and settlements using CBDCs.

An operational mBridge platform could materially reduce the cost and friction of cross-border payments involving Hong Kong, mainland China, and other participating jurisdictions—with significant implications for trade finance, remittances, and correspondent banking.

Implications for Virtual Asset Businesses

The emergence of CBDCs raises important questions for virtual asset exchanges, stablecoin issuers, and payment service providers. A retail e-HKD could serve as a form of digital cash that competes with private stablecoins in the payments space, potentially reducing the demand for HKD-pegged stablecoins for domestic payments.

At the same time, CBDCs and virtual assets are increasingly seen as complementary rather than competing. CBDCs could serve as the settlement layer for tokenised asset transactions, enabling atomic delivery-versus-payment in digital securities markets.

Conclusion

The e-HKD initiative represents one of the most significant developments in Hong Kong's financial architecture in decades. While the HKMA has not yet committed to issuing an e-HKD, the pilot programme has generated valuable insights and positioned Hong Kong as a leading jurisdiction in CBDC research.

Financial institutions, technology companies, and virtual asset businesses should monitor developments closely and engage with the HKMA's ongoing consultations. The legal, regulatory, and commercial implications of a potential e-HKD are far-reaching, and early preparation will be essential.

Alan Wong LLP advises financial institutions, fintech companies, and virtual asset businesses on regulatory developments including CBDC, stablecoin regulation, and digital payments in Hong Kong. Contact us to discuss how these developments may affect your business.