Given that Hong Kong is anticipated to issue its electronic Hong Kong Dollar (e-HKD), U.S. policymakers must expect what a successful issuance of Hong Kong’s digital fiat currency would entail for the global financial system. There is much potential for U.S. national security worries in analysing why Hong Kong may desire its central bank digital currency (CBDC).
In 2017, Hong Kong began investigating a CBDC. The e-Bank HKD’s of International Settlements (BIS) study examining several CBDC issuance models is well-considered, including the design trade-offs between the operational division of labour and data security.
Typical justifications for releasing digital central bank currency, such as increased financial inclusion and lower credit risk, look good on paper but are not persuasive when seen in the context of Hong Kong’s economy. Since the under-banked population in Hong Kong is tiny, financial inclusion is not a sufficient reason to promote the e-HKD.
The second reason for limiting credit risk during financial insecurity is more compelling. By introducing CBDCs like the e-HKD to the public, central bank money may be held electronically. Because the e-HKD is a central bank obligation, it is not related to the collapse of commercial companies, reducing credit risk.
Network effects may emerge as a growing number of central banks implement CBDCs. People have stated that the future of several CBDCs will likely be decentralised. In contrast to the existing global financial network, the future CBDC network might consist of several central banks, or “nodes,” interconnected by CBDC-to-CBDC platforms. By adopting CBDCs early and influencing CBDC standards, central banks might shift the financial power balance away from the U.S. and other developed nations in a CBDC future.
Among the first monetary authorities to test CBDC interoperability is the HKMA. A multi-CBDC platform would necessitate CBDCs from other jurisdictions to join. The mBridge project enables banks to transport wholesale CBDCs across international boundaries, so long as the flows are validated by the mBridge ledgers of each participating central bank (mBL). While the HKMA and other central banks are investigating potential future financial conduits, developed-world central banks are conspicuously missing from this endeavour.
The Hong Kong Monetary Authority (HKMA) has published a Fintech 2025 vision paper that outlines five ambitious targets, including financial technology innovation, labour force supply, regulatory environment, data infrastructure, and the development of cross-border capabilities. There is no smoking gun proof that the PBOC directly influenced the fintech development paths of the HKMA. Nonetheless, the HKMA’s objectives are to digitise and increase the productivity of Hong Kong’s economy, which is consistent with the two fintech growth plans that have emerged from the mainland in the past several years.
It is uncertain whether the e-HKD will be adopted entirely, notwithstanding Hong Kong’s anticipated rollout of a larger-scale e-HKD trial. However, the absence of an official delivery date cannot explain the delay. Hong Kong and other financial centres’ decision to investigate CBDCs, such as Singapore’s Project Orchid, should teach the U.S. government the importance of monitoring joint CBDC activities. In addition to monitoring, the Federal Reserve of the United States should be present during these enormous efforts to construct alternate pipelines. This does not necessitate the United States creating its own CBDC, but it emphasises the importance of U.S. involvement in standard-setting efforts.
mBridge may define the features of alternative financial infrastructure over time. Yes, the proliferation of CBDCs across international boundaries may be a pipe dream for many central banks. BIS has invited other central banks to participate. Thus the Federal Reserve should be present to influence the ground rules. The mBridge consortium of central banks has already committed to doing no damage, with compliance and interoperability as guiding principles.
To preserve U.S. leadership in the global financial system, the U.S. government should monitor CBDC developments and other standard-setting institutions’ debates.