The Bank of Korea (BOK), along with financial regulators and the Bank for International Settlements (BIS), announced their collaboration in conducting trials for the implementation of Central Bank Digital Currency (CBDC) with the aim of advancing a prospective monetary framework. This CBDC pilot initiative, set to include contributions from both public and private entities, encompasses the setup of the requisite infrastructure followed by testing it on regular users in the fourth quarter of the upcoming year.
The CBDC project could shape regulatory guidelines
The latest BOK project, slated to commence right after the system is set up in the fourth quarter of 2024, aims to evaluate the feasibility of a prospective monetary system centered around wholesale CBDCs.
Within the CBDC network established by the BOK, commercial banks will issue payment instruments in form of tokenized deposits, which will be accessible to the general public. The central bank, in collaboration with the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), will jointly oversee the system. These payment instruments will circulate within the CBDC network.
Ryoo Sang-dai, senior deputy governor at the BOK, stated during a press conference that the bank is taking its first step in preparing for the infrastructure of the future digital financial system.
FSC Vice Chairman Kim So-young noted that the Bank for International Settlements (BIS) has shown keen interest in this experiment, citing Korea’s advanced IT capabilities and diverse payment systems used by its citizens. Kim also highlighted that the tokenized payment system will mitigate risks as payments are processed in real time. The utilization of smart contracts will further reduce the likelihood of receiving illicit funds or encountering transaction errors. Additionally, Kim indicated that the CBDC project may serve as a standard for shaping regulatory guidelines for stablecoins, a type of cryptocurrency pegged to another asset class.
The objective of the CBDC project is not to create a completely cashless society, he said, but rather to explore an alternative payment system that may prove to be more stable and practical, according to an FSC spokesperson. Its adoption could expand if it demonstrates broader applicability.
The BOK emphasized that this project is part of an ongoing process to identify an optimal CBDC design tailored to the economic and financial circumstances of Korea. However, it does not constitute an official introduction of a CBDC, and the design of the CBDC network established for this project does not imply a finalized design.
Bank of Korea has selected 3 pilot cities
The Bank of Korea has identified three regions, excluding the capital Seoul, for piloting its central bank digital currency (CBDC), according to an earlier report. Jeju, Busan, and Incheon have been chosen as candidates for the “private target CBDC test bed.” The bank’s plan is to eventually select one of these regions for conducting experiments on payments and distribution at a public level, as well as establishing franchises that can accept payments via CBDC.
An official from the bank mentioned that the CBDC electronic wallet app will be accessible not only to local residents but also to a wide range of individuals, including tourists.
The Bank of Korea stated that the regional closed tests of the CBDC will follow a similar process to the issuance and distribution of the current local currency scheme implemented in various regions of South Korea. This local currency scheme was introduced during the COVID-19 pandemic as a means of providing basic income and relief payments. The pilot regions all currently issue and distribute their own local currencies, such as “Tamranjeon,” “Dongbaekjeon,” and “Incheon e-Eum,” respectively.
A representative from a commercial bank in Korea noted that in Busan, the number of eligible citizens is “so large that the Bank of Korea is burdened in many ways,” which led to a preference for Jeju, which has the second-largest population. Further, a report noted that the local currency scheme faces fewer “technical barriers” compared to CBDCs. Several banks in South Korea have indicated that they are conducting research on stablecoins as potential alternatives to CBDCs for efficiency purposes.
