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Dethroning the Old Dollar: CBDCs Leading the Way in Asia

July 04, 2023 - 6 min read

A handful of countries are rolling out the red carpet for CBDCs for wholesale use by central banks as well as retail users.

project mbridge - dunbar - ehkd - cbdc

Introduction to Stablecoins and CBDCs

Stablecoins are a type of liquid crypto asset which has a pegged value to a relatively stable asset like the USD, other fiat currencies, or even commodities like an ounce of gold. They’re understood to be issued by private companies like Circle or Tether. So far, stablecoins like USDC and USDT have worked in form and function, but some have criticized the legitimacy and security issues with the concept of privately issued money – even if it is backed 1-to-1 with money in the bank.

After years of lagging behind software companies, governments are starting to realize that market forces will soon leave them behind technologically. In response, many of them have been busy testing out pilot programs for their own stablecoins issued by central banks. These are commonly known as central bank digital currencies, or CBDCs. 

CBDCs are distinguishable from stablecoins in that they’re developed, issued, and regulated in coordination with governments and central banks. That means CBDCs are designed by governments to be recognized and issued as legal tender. This would give people, or banks, a clear mandate to use specified CBDCs for trade instead of privately-issued stablecoins. 

While stablecoins emerged in response to the volatility of cryptocurrencies and on-chain liquidity for DeFi token swaps, CBDCs are more about modernizing an antiquated central banking and clearinghouse infrastructure. This should speed up settlement times for transactions, and provide more well-defined regulations on the emerging nuances of transacting with CBDCs, including the preferred reserve currency for efficiently and securely settling international trade.

Cross-Border CBDC Swaps via Project mBridge

This could be a paradigm shift in terms of using the dollar for pricing commodities, issuing loans, and settling cross-border trade. Recently, the term de-dollarization has been used more frequently in response to chilling international relations and aggressive sanctions by the US and its allies. 

Even major domestic banks got rug-pulled by the US Federal Reserve from holding so-called “safe” assets, in the form of treasuries, only to face Powell’s sudden and aggressive rate hiking cycle. Memories of wildcat bankers and the downfall of banking pre-Federal Reserve come to mind when history rhymes like this. 

Not wanting to be rug-pulled as nation-states, Hong Kong, Thailand, Dubai, and China have consequently taken the first steps towards settling international trade outside of the dollar system with project mBridge. In Q3 2022, the project went forward with its implementation of a cross-border CBDC using Ethereum’s Solidity smart contracts, the Ethereum Virtual Machine, and HotStuff for the consensus mechanism.

“Notably, Singapore was previously involved with another cross-border CBDC pilot program called Project Dunbar in cooperation with Malaysia, South Africa and Australia.”

The mBridge pilot lasted for six-weeks in which 20 banks in the four jurisdictions used the mBridge platform to conduct payment and FX transactions totalling more than HK$171 million. During the pilot, commercial banks could request the issuance or redemption of the mBridge CBDC with fiat reserves at their local central bank. 

Additionally, participants could hold foreign CBDCs, initiate cross-border P2P push payments, and execute FX swaps with other commercial banks.Of course, they used a permissioned ledger with an access-control layer, meaning that they could keep their domestic banking affairs private while still keeping their assets on-chain. Zero knowledge proofs are being explored in subsequent phases to further safeguard the financial records of participants.

Perhaps unsurprisingly, the most transactions were carried out by the People’s Bank of China. This could be that their domestic CBDC was already in place to automate CBDC issuance and redemption automatically between its own infrastructure and that of Project mBridge. 

Notably, Singapore was previously involved with another cross-border CBDC pilot program called Project Dunbar in cooperation with Malaysia, South Africa and Australia. Such programs have helped to refine domestic financial infrastructure at the cutting edge of technology and inch slowly towards de-dollarization, one phase at a time.

Both Nigeria and Zimbabwe have issued their own CBDCs as well. Without taking sides, we cannot ignore this reality as we witness countries making their first attempts to do so.

Hong Kong Leads with Tokenized Assets and Retail e-HKD

More recently, the Hong Kong Monetary Authority (HKMA) has announced the launch of its digital Hong Kong dollar pilot CBDC. Hong Kong’s three note-issuing lenders will take part in the trial: HSBC, Standard Chartered Bank, and Bank of China (HK subsidiary). Readers should take note that these are not central banks, despite the “CB” part of the acronym. That is, calling the e-HKD a CBDC is somewhat of a misnomer.  

This is significant as it represents the retail CBDC for use by commercial banks and end users. On the other hand, Hong Kong’s involvement with Project mBridge was all about testing the payment rails for the central banks to operate amongst themselves. Keeping these two concepts distinct will help understand the significance of both and make discussions regarding both projects more salient. 

Having said that, over a dozen banks and payment companies in Hong Kong will be selecting a few clients to pilot several payment use cases and their applications for their CBDC, which has been called the e-HKD. In addition to testing out a variety of payments and token distribution pilots, Visa will also be working with HSBC bank to simulate tokenized deposit transactions. Given that millions of users in Hong Kong are already using Alipay or WeChat for digital payments, the retail CBDC shouldn’t be difficult to implement once security parameters are ironed out.

Challenges Faced in Rolling Out the e-HKD

Will the e-HKD offer staking, or pay interest to token holders? Not so fat, even the HKMA realizes that a retail CBDC could result in commercial bank runs. They actually recommended that the e-HKD should be non-interest paying to avoid this risk. 

For instance, what would people do if they realized they could get a 5% yield on stablecoins held at their central bank? Clearly, many would rush to move their bank deposits from low-interest bearing savings accounts to the new option. To remedy this, banks would need to rush to raise the rates offered to their own clients, but then this would hurt their business model as it would likely raise their costs to make the bank unsustainable. 

According to the HKMA, the pilot’s results are to be released in a full report this November. Though there has been no mention of a target date for rolling out the e-HKD, it’s safe to assume that we’re still a few years away from full deployment. Until the risk-reward dynamic tilts more in favor of the latter, most CBDC programs will remain in sandbox mode until central bankers’ risk aversion subsides.


  1. Bank for International Settlements. (2022, 22 Mar.). Project Dunbar: International settlements using multi-CBDCs. BIS Innovation Hub.
  2. Bank for International Settlements. (2022, 26 Oct.). Project mBridge: Connecting economies through CBDC. BIS Innovation Hub.
  3. Yiu, E. (2023, 18 May). Hong Kong launches e-HKD pilot programme, with 16 companies to test digital currency for public use in shops, restaurants. South China Morning Post.

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