The idea of a central bank digital currency is the digital form of a country's fiat currency. A number of state banks are said to be exploring the idea.

A digital family office in Asia has welcomed moves by Hong Kong’s central bank to pave the way for a central bank digital currency (CBDC) – a move that has also raised controversy about the impact on banking and privacy.  

“As we enter a new era of wealth management, the competition is fierce with multiple jurisdictions globally introducing digital versions of their fiat currencies,” Ray Tam, chief executive at Revo Digital Family Office, said. (Revo is part of Raffles Family Office.)

Last week, the Hong Kong Monetary Authority announced the start of the e-HKD Pilot Programme. A total of 16 firms from the financial, payment and technology sectors have been chosen to take part in the first round of pilots for 2023. The pilots will explore the potential use of areas including programmable payments, offline payments, tokenized deposits, settlement of Web3 transactions and settlement of tokenized assets.

“The e-HKD Pilot Programme is a key component of Rail 2 under the HKMA’s three-rail approach in paving the way for the possible implementation of a retail central bank digital currency (CBDC), i.e. e-HKD, in the future,” the HKMA said in a statement. The organisation said it will set up an expert group to blend ideas of industry, academia and government on CBDCs.

“We welcome HKMA's proactive stance in initiating the pilot scheme. We believe e-HKD will be a strategic instrument in propelling Hong Kong’s digital economy and ultimately cementing Hong Kong’s position as a world financial centre, as we see investment and use case in terms of diversification, risk mitigation and cost efficiency,” Tam said.

CBDCs face challenges. The Switzerland-based Bank for International Settlements in 2021 said: “A significant shift from bank deposits into CBDCs (or even into certain new forms of privately issued digital money) could have implications for lending and intermediation by the banking sector. However, our analysis also suggests that these impacts would likely be limited for many plausible levels of CBDC take-up, if the system had the time and flexibility to adjust.”

Elsewhere, the UK Treasury and Bank of England, for example, said a CBDC is likely to be needed in the future. The US Federal Reserve explored the idea, setting out a discussion paper on the pros and cons, last year. 

The rise of bitcoin and other digital assets over recent years raises the risk that central bank issuers of state fiat currency – which in nearly all cases are no longer backed by gold – could lose out to new currency models. More than a decade of massive central bank money printing, heightened by the pandemic, has sparked worries about inflation. Policymakers also fret that cryptocurrencies are conduits for criminal activity and tax evasion.

With central banks driving digital currencies, the worry is that individuals’ privacy could be compromised. For example, in July 2022, Dr Andrea Baronchelli, lead author and Token Economy Theme Lead at The Alan Turing Institute, said: “Central bank digital currencies have the possibility of being more financially inclusive by offering convenience and low transaction costs. However, this comes at the risk of our privacy which we don’t believe should be compromised. We are in a unique position to encourage policymakers to make good design decisions as early as possible – before bad features become entrenched.”