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Breaking Barriers: How e-HKD Could Potentially Fuel the Rise of Tokenized Assets and Crypto Adoption

Breaking Barriers: How e-HKD Could Potentially Fuel the Rise of Tokenized Assets and Crypto Adoption

This article provides an overview of e-HKD - Hong Kong’s Central Bank Digital Currency (CBDC), its development milestones, and how it may become the first CBDC that supports the coexistence with digital assets.


- The Hong Kong Monetary Authority (HKMA) is developing e-HKD as part of its Fintech 2025 strategy.

- e-HKD is a digital representation of physical banknotes, with separate wholesale and retail systems.

- e-HKD is currently in its pilot phase and is being developed to encourage the growth of digital assets. This initiative aligns with a host of new pro-crypto policies and regulations by the HKMA.

Overview of e-HKD

What is e-HKD?

e-HKD is a Central Bank Digital Currency (CBDC) being developed by the Hong Kong Monetary Authority (HKMA) as an integral component of its "Fintech 2025" strategy. The primary objective of this strategy is to ensure that Hong Kong is adequately prepared for the adoption of CBDCs in the future.

e-HKD is solely a digital representation of physical banknotes, so it will not directly affect the Hong Kong dollar's peg to the US dollar. The architecture of this CBDC consists of a wholesale system for issuance and interbank transactions, alongside a retail system for distribution and circulation. The wholesale system uses Distributed Ledger Technologies (DLT) and involves selected intermediaries and the central bank. The retail system is accessed by intermediaries and the general public. The two-tier model ensures secure communication between systems and allows for efficient CBDC distribution. Synchronization and validation between the wholesale and retail systems are achieved through signed transactions and validator infrastructure.

Important milestones

The research for e-HKD started with investigating the wholesale system in Project LionRock in 2017, which looked into CBDC's applications in large-value payments and settlement.

Two years later, in 2019, the HKMA collaborated with Bank of Thailand to initiate Project Inthanon-LionRock to explore cross-border payments with CBDC. This collaboration led to the development of a successful DLT-based Proof-of-Concept prototype involving ten participating banks from both regions.

Taking the research further, the project evolved into researching Multiple CBDC Bridge (mBridge), with partners from Mainland China, the UAE, and Thailand. mBridge aims to facilitate real-time cross-border foreign exchange transactions and potential business use cases with both domestic and foreign currencies. This time, 22 institutions across 11 industries from four participating jurisdictions joined forces to identify 15 potential business use cases for mBridge. During the six-month pilot program in 2022, mBridge successfully facilitated the transfer of over HKD 171 million across borders on behalf of corporations.

On the other hand, the development of the model for retail e-HKD was a collaborative endeavor undertaken by the HKMA and the Bank for International Settlements (BIS). Together they released a technical whitepaper for e-HKD in 2021, the first in-depth whitepaper for CBDC in the world. The whitepaper unveiled potential design options for e-HKD with privacy preservation arrangements that allow transaction traceability.

To fully encourage the potential implementation of e-HKD in the future, the HKMA has adopted a “three-rail” approach. This approach includes laying technological and legal foundations, conducting deep-dives into use cases and implementation through pilots, and ultimately launching e-HKD. The HKMA is committed to monitoring global trends to ensure e-HKD's timely availability, addressing market demands and strengthening Hong Kong's global payment competitiveness.

With e-HKD, the HKMA aims to revolutionize Hong Kong's financial landscape, offering a modern, efficient digital currency that caters to consumer needs, enhances financial stability, and solidifies Hong Kong's position as a leading international financial center.

e-HKD and Hong Kong’s Bid to Drive Crypto Adoption and Digital Transformation

Hong Kong has demonstrated a strong commitment to supporting the development of cryptocurrencies and Web3 technologies, positioning itself as a leading hub in the industry. The government's implementation of the Virtual Asset Development Policy in October 2022 has created an environment conducive to cryptocurrency growth. This policy provides clarity and guidance for businesses operating in the virtual asset space, fostering investor confidence and attracting interest from numerous crypto-related firms. As a result, more than 80 crypto-related firms have expressed a keen interest in establishing a presence in Hong Kong, a testament to the city's favorable ecosystem for digital assets.

To bolster its appeal and maintain its competitive edge, Hong Kong is set to introduce a comprehensive and transparent licensing regime for virtual asset service providers in June 2023. This licensing framework will provide clear guidelines and regulations for companies operating in the virtual asset space, ensuring greater transparency, security, and regulatory oversight.

Furthermore, the introduction of a regulatory framework for stablecoins, currently under development by the HKMA, further underscores Hong Kong's dedication to digital transformation. This framework, expected to be implemented in 2024, will provide clarity and guidance for the operation of stablecoins, contributing to the growth and stability of the digital asset ecosystem in Hong Kong. According to Christopher Hui, Secretary for Financial Services and the Treasury, Hong Kong's focus on Web3 technology and applications underscores the dedication to embracing innovative financial technologies and becoming a prominent Web3 hub in Asia and beyond. Therefore, it comes as no surprise that the development of e-HKD partly serves to foster the growth of digital assets in Hong Kong.

In fact, in May 2023, the HKMA stated in a press release that the e-HKD Pilot Programme aims to explore potential use cases for the e-HKD in various categories, including tokenized deposits, settlement of Web3 transactions, and settlement of tokenized assets. By actively engaging in this pilot program, Hong Kong exhibits its proactive approach to leveraging digital currencies.

A notable collaboration within the e-HKD Pilot Programme involves Ripple and Fubon Bank, which aims to promote the use of digital assets in Hong Kong, focusing on real estate asset tokenization and equity releases using e-HKD. By leveraging Ripple's CBDC platform, the solution will facilitate streamlined loan services and flexible payments for commercial banks in Hong Kong. The partnership between Ripple and Fubon Bank also highlights the potential of a future financial structure where CBDCs and other digital assets can work in tandem. Unlike China's CBDC, the e-CNY, which is positioned to replace stablecoins, Hong Kong's approach embraces the coexistence of CBDCs and other digital assets. The collaborative effort shows the potential for innovative financial solutions that integrate traditional banking systems with emerging digital technologies.

The partnership between the HKMA and Ripple exemplifies the region's willingness and open-mindedness towards embracing blockchain and digital assets. Instead of adopting a restrictive attitude or outright banning new technologies, Hong Kong shows its readiness to explore and harness the potential benefits of blockchain technology and distributed ledger systems in the financial sector. This forward-thinking stance positions Hong Kong as a proactive player in driving digital transformation.

The utilization of blockchain technology and distributed ledger systems has been proven throughout the years to enhance security, transparency, and efficiency in financial transactions across various use cases. By actively engaging with Ripple in the e-HKD Pilot Programme, the HKMA seems to recognize the potential advantages that these technologies have to offer, further demonstrating their commitment to fostering an innovative financial ecosystem that can benefit businesses and individuals alike.

While the outcome of the pilot program remains uncertain, the collaboration between the HKMA and firms like Ripple signifies a notable step towards exploring the coexistence of digital assets and central bank currencies in a mutually beneficial manner. This approach challenges the common notion that traditional financial systems and emerging technologies cannot exist at the same time, and that one will lead to the perish of another. Instead, it embraces the potential for integration and synergy between these two realms.

Hopefully, this will set a positive example for other regions, illustrating that a balanced and open-minded approach can lead to the discovery of novel solutions and the creation of a robust and dynamic financial ecosystem.

Breaking Barriers: How e-HKD Could Potentially Fuel the Rise of Tokenized Assets and Crypto Adoption image 0Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.