With the wave of financial technology (FinTech) sweeping across the globe, central bank digital currencies (CBDC) issued by national central banks have moved from theory to practice and become a hot topic in the global financial industry. The Hong Kong Monetary Authority is also closely following this trend and actively promoting the “Digital Hong Kong Dollar Pilot Program” to explore the future form of money. However, what exactly is a central bank digital currency? How is it fundamentally different from the online banking and street electricity payment we use in daily life? More importantly, what kind of disruptive impact and opportunities will this innovation bring to the CBDC impact on traditional banking? This article will provide a clear and in-depth explanation, helping you fully understand the core concept of the digital Hong Kong dollar, its pilot progress, and future challenges in one read.
To understand CBDC, you can think of it as a “digital version of cash” issued and backed directly by the national central bank. It is neither as decentralized as Bitcoin, nor a liability of commercial banks like bank deposits, but a direct liability of the central bank, carrying the highest level of credit.
In simple terms, a central bank digital currency (CBDC) is the digital form of legal tender, issued and managed by a country’s central bank. It has the following core features:
Many people confuse CBDC with Bitcoin, USDT, or even the balance in bank apps. In reality, they are fundamentally different in terms of issuer, value stability, and legal status. The table below makes it clear at a glance:
| Comparison Dimension |
Central Bank Digital Currency (CBDC) |
Cryptocurrency (e.g. Bitcoin) | Commercial Bank Deposits (Electronic Payments) |
| Issuer | Central bank | Decentralized network (no specific issuer) | Commercial banks |
| Nature | Direct liability of the central bank (M0) | A digital asset | Liability of commercial banks (M1/M2) |
| Value stability | Pegged 1:1 to the country’s legal tender, value is stable | Highly volatile | Stable in value, but exposed to commercial bank credit risk |
| Legal status | Legal tender | Usually does not have legal tender status | Widely accepted means of payment |
| Anonymity | Controlled anonymity (Managed anonymity) | Pseudonymous | Real-name system |
As an international financial center, Hong Kong has long been at the forefront of central bank digital currency (CBDC) research. The “Digital Hong Kong Dollar” (e-HKD) pilot program led by the Hong Kong Monetary Authority (HKMA) aims to explore the potential applications and challenges of CBDC at the retail level in Hong Kong.
Hong Kong’s CBDC exploration is divided into multiple phases, progressing step by step to test feasibility:
The e-HKD pilot program has tested various innovative applications, with the following three attracting the most attention:
The emergence of CBDC represents a fundamental reshaping of the current financial system. Traditional banks, as core financial intermediaries, will be directly affected. This brings both unprecedented challenges and opportunities for transformation.
This is the most critical concern for the banking industry. Since CBDC is a direct liability of the central bank, it carries higher credit quality than any commercial bank. During periods of economic instability, depositors may shift large amounts of bank deposits into CBDC for safety, leading to deposit outflows and what is known as a “digital bank run”. This weakens banks’ core function as financial intermediaries, affects their lending capacity, and may ultimately impact the real economy.
Currently, most retail payments are processed through bank clearing systems or third-party payment platforms. CBDC provides a new payment rail operated directly by the central bank, enabling instant peer-to-peer transactions without intermediaries. This poses a direct threat to banks’ payment fee income. However, banks can also leverage CBDC infrastructure to develop more efficient and low-cost innovative payment services to respond to this challenge.
CBDC systems will process massive volumes of transaction data. While central banks may provide a degree of anonymity, full anonymity is not possible due to anti-money laundering and anti-illegal financing requirements. Striking a balance between user privacy and regulatory compliance is a major challenge. In addition, a centralized CBDC system could become a target for cyberattacks, raising the bar for overall financial system cybersecurity.
CBDC provides central banks with more direct and precise tools for implementing monetary policy. For example, during economic downturns, central banks could distribute digital currency directly into people’s wallets, enabling targeted “helicopter money”. In addition, central banks could potentially apply interest rates to CBDC, including negative interest rates, significantly enhancing monetary policy transmission. However, this may also disrupt banks’ traditional deposit-lending interest margin model.
Amid challenges lie new opportunities. The CBDC infrastructure, especially its integration with tokenization technology, opens up new business areas for banks. Leveraging their expertise and customer base, banks can provide value-added services such as:
A: No. According to the Hong Kong Monetary Authority, the introduction of the Digital Hong Kong Dollar is intended to complement cash, not replace it. It will coexist with physical cash in the long term, providing the public with a safer and more efficient payment option, especially in digital economic scenarios. The public will still be able to freely choose to use physical cash.
A: At present, the prevailing global design approach is that basic payment functions of retail CBDC will be free or close to free to promote adoption and financial inclusion. Commercial entities may develop value-added services based on CBDC and charge certain fees, but basic peer-to-peer transfers are expected to carry no transaction fees.
A: Your bank deposits are safe and protected under deposit protection schemes. The main impact of CBDC is that it offers an asset option with higher credit quality than commercial bank deposits. To prevent large-scale deposit outflows, central banks around the world generally consider mechanisms such as holding limits or tiered interest rates for large balances when designing CBDC, in order to maintain financial stability.
A: The key difference lies in the issuer and regulatory framework. The Digital Hong Kong Dollar is issued by the central bank and is legal tender; USDT and other stablecoins are issued by private companies, and their reserve transparency and compliance have long been subject to debate, carrying certain credit and regulatory risks. In simple terms, the Digital Hong Kong Dollar is an “official product” while stablecoins are “private-sector products”.
In summary, central bank digital currency is an inevitable evolution of legal tender in the digital era, representing a major trend in the future of finance. The steady progress of the “Digital Hong Kong Dollar Pilot Program” shows that Hong Kong is actively preparing for this transformation. While CBDC brings profound impacts on traditional banking, from deposit stability to payment business models, it also creates significant innovation opportunities in tokenized economies and programmable financial services. For investors and the general public, understanding what central bank digital currency is in advance will help us better grasp the pulse of the future digital economy and adapt to the emerging financial landscape with confidence.
