Hong Kong has launched a pilot program for the digital yuan, the central bank digital currency (CBDC) issued by the People’s Bank of China (PBoC). While this marks the first deployment of the digital yuan outside mainland China, the pilot is currently limited to cross-border transactions and does not support person-to-person (P2P) transfers within Hong Kong.

Residents can sign up for a digital yuan wallet using just their phone number, and these wallets can be topped up through 17 retail banks via the Faster Payment System (FPS). The Hong Kong Monetary Authority (HKMA) announced on May 17 that this integration marks the first time a CBDC has been incorporated with the FPS.

The Digital Currency Institute (DCI) is responsible for the interoperability infrastructure between the FPS and the digital yuan, aiming to enhance cross-border payments as part of the G20 countries’ roadmap. Similar to blockchain protocols, the digital yuan pilot allows for 24/7 payments.

Eddie Yue, Chief Executive of the HKMA, highlighted that the e-CNY application and wallet will gradually gain more functionality as efforts are made to facilitate greater retail merchant adoption. Yue stated, “By expanding the e-CNY pilot in Hong Kong and leveraging the 24x7 operating hours and real-time transfer advantages of the FPS, users may now top up their e-CNY wallets anytime, anywhere without having to open a Mainland bank account, thereby facilitating merchant payments in the Mainland by Hong Kong residents.”

At present, the e-CNY wallets can only be used for cross-border payments, but the HKMA and DCI plan to upgrade these wallets to "higher tiers" through real-name verification. Future plans also include facilitating corporate use cases for cross-border trade settlements.

While CBDCs offer the promise of greater financial inclusion, there are concerns about their potential for intrusive surveillance. For example, in July 2023, Brazil’s central bank published the source code for its CBDC pilot, revealing surveillance and control mechanisms that could allow the central bank to freeze or reduce user funds within CBDC wallets.

China’s digital yuan is one of the most advanced CBDC projects among the 140 countries worldwide working on similar pilots. The PBoC aims to facilitate greater use of the yuan, which is already widely accepted in Hong Kong, especially in tourist areas. However, the yuan is not currently used for public transportation in Hong Kong, and exchange rates offered by exchanges for Hong Kong dollars are often unfavorable.

The digital yuan pilot in Hong Kong could potentially increase the use of the yuan, as the PBoC seeks to foster more merchant acceptance of the CBDC.