First phase of CBDC testing completed with successful results

Representations of Bitcoin and fiat currencies, including the dollar and Turkish lira. [REUTERS/YONHAP]

The first phase of a central bank digital currency (CBDC) test has been completed, with the second of the two phases set for completion in June.

A CBDC is the virtual form of a fiat currency that is issued and regulated by the nation's monetary authority or central bank.

The Bank of Korea said on Monday that it has tested the basic functions of the CBDC's operation, including its production, publication and distribution, in the first stage, which wrapped up last month. The test was conducted under the premise that the CBDC is used on a Samsung Electronics Galaxy smartphone.

In the second phase, which got underway on Dec. 23, the central bank is testing additional functions, like the feasibility of making a payment without an internet connection and adding new technologies, such as those strengthening the protection of personal data.

Kakao's Ground X was chosen last year to work with the central bank of the feasibility study.

"We have confirmed the normal operations of the CBDC's basic functions based on the distributed ledger technologies as a result of the first stage" test, the central bank said in a statement on Monday. "But additional experiments are needed to test whether the same functions can be realized in the actual environment."

The central bank will team up with financial institutions to place the CBDC in real-world environments after the second stage in complete in June.

"The Bank of Korea will partner with the IT and finance industry to seek a utilization plan for the CBDC," the bank added.

In a report released on the same day, the central bank noted concerns about the adoption of the CBDC.

It said there are concerns CBDC adoption could weaken the fund brokerage function of financial institutions, the effectiveness of monetary policy and the integrity of financial institutions and their systems.

"But the CBDC has only been adopted in a small number of developing nations. There are no specific plans or operational methods of the CBDC, so the theories are limited to being theoretical analysis and assumptions," the central bank said.

Global central banks have been working on digital currencies as cash usage lowers and finance becomes quickly digitized, as with the rise of stablecoins, digital currencies pegged to a reserve asset like the U.S. dollar.

China has been pushing for its own CBDC, rolling out a virtual version of the yuan in trials in several provinces. The United States began a review of CBDCs last week.

"It's difficult to assert that all central banks will adopt CBDCs in the future, and even if they do decide to adopt one, it is expected to take a considerable amount of time until it is actually issued."

CBDCs has been adopted in a number of emerging nations, including Bahamas and Nigeria. But the development of the payment and transaction systems have been slow.

BY JIN MIN-JI [jin.minji@joongang.co.kr]