December 13, 2022
Why Hong Kong Is Pushing for Its Own Central Bank Digital Currency
With Hong Kong likely to issue its electronic Hong Kong Dollar (e-HKD), this month, U.S. policymakers need to anticipate what a successful issuance of Hong Kong’s digital fiat means for the existing global financial order. An examination of why Hong Kong may want its own central bank digital currency (CBDC), its fintech development strategy and its diminishing political openness leaves plenty of room for U.S. national security concerns.
The e-HKD is Hong Kong’s bid amid a Cambrian explosion of central bank digital currency projects around the globe. Hong Kong started exploring a CBDC in 2017. U.S. policymakers may applaud the HKMA’s care in designing its CBDC. The e-HKD’s Bank for International Settlements (BIS) paper discussing different CBDC issuance models is thoughtful, covering the design trade-offs between operational division of labor and data security. If the “safety, privacy and flexibility” principles of the pilot actually manifest in the e-HKD, it would be wonderful news to U.S. policymakers. However, it is important to consider why Hong Kong wants to issue the e-HKD in the first place.
To safeguard U.S. leadership in the global financial order, the U.S. government should be monitoring CBDC developments, and proactively shape the agenda of the meetings taking place
Typical drivers for issuing digital central bank money, such as enhanced financial inclusion and reduced credit risk, seem good on paper, but are not convincing when considered in Hong Kong’s financial context. Since the under-banked population is negligible in Hong Kong, financial inclusion alone is not a compelling rationale to promote the e-HKD (and even the HKMA policy paper agrees). The second motivation of mitigating credit risk during financial instability has more mileage. Introducing CBDC like the e-HKD to the public means they can hold central bank money in electronic form. Because the e-HKD is the liability of the central bank it is not tied to the failure of commercial entities, which then reduces credit risk. Granted, Hong Kong’s status as an international financial center is on shaky ground given mainland China’s firm grasp on Hong Kong’s political liberty and democratic governance. Nevertheless, there does not seem to be a systemic credit event on the horizon that would warrant issuing a CBDC as a preemptive response.
Read the full article from CoinDesk.
More from CNAS
-
Our Man in Damascus? Sanctions and Governance in Post-Assad Syria
Commentary
The complexity of the legal and policy issues presented by the sanctions thicket surrounding Syria—and the disparate authorities responsible for various parts of it—will requi...
By Alex Zerden
-
Ziemba: Russia & Iran Concentrating on Own Battles
Video
The rebel-led alliance in Syria is set to form a transitional government, after overthrowing President Bashar Al Assad. Reports say the reason the Assad regime fell so quickly...
By Rachel Ziemba
-
Sharper: Tariffs
Commentary
The incoming Trump administration has signaled that tariffs will be a central pillar of its economic strategy, with significant implications for international trade, the Ameri...
By Eleanor Hume, Charles Horn & Gwendolyn Nowaczyk
-
Taking Trump’s Tariffs Threats Seriously
Podcast
Join Emily and Geoff to catch up on a whole bunch of economic security news, including the ill fated Nippon Steel / U.S. Steel deal, new chips export controls, and TikTik’s ba...
By Emily Kilcrease & Geoffrey Gertz
