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.
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