Financial institutions band together for Korean digital currency trial

Finance

Published: 04 Oct. 2023, 16:59 Updated: 04 Oct. 2023, 19:46

Financial institutions band together for Korean digital currency trial

Financial Services Commission Vice Chairman Kim So-young, center, speaks during a press conference held on central bank digital currency project at the Bank of Korea office in central Seoul on Wednesday. [JOINT PRESS CORPS]

The Bank of Korea (BOK), financial regulators and the Bank for International Settlements (BIS) will cooperate in testing the commercialization of Central Bank Digital Currency (CBDC) with the goal of developing a future monetary system, the institutions said on Wednesday.

The plans for the CBDC pilot project, which will involve participation from both the public and private sectors, involve the establishment of the relevant system and then testing it on ordinary users in the fourth quarter of next year.

CBDC is a new form of money issued digitally by a central bank. Retail CBDCs are directly accessible to general economic entities, including households and businesses, while wholesale CBDCs are exclusively available to financial institutions for the purposes of interbank fund transfers and final settlements.

BOK initiated research on CBDC in 2020.

The latest project, which is scheduled to start this month and run through the end of next year, aims to assess the feasibility of a future monetary system based on wholesale CBDCs.

Commercial banks will issue payment instruments in the form of tokenized deposits, which will become accessible to the general public, within the CBDC network built by the BOK. The central bank, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) will jointly manage the system. The payment instruments will be circulated within the CBDC network.

“We’re taking our first step in preparing for the infrastructure of the future digital financial system,” said Ryoo Sang-dai, senior deputy governor at the BOK, during a press conference held at the central bank headquarters in central Seoul on Wednesday.

“BIS has paid great attention to our experiment as Korea has advanced IT technologies and citizens use various means of payment systems,” said FSC Vice Chairman Kim So-young at the event.

Kim added the tokenized payment system will eliminate risks as payment is made in real time. Use of smart contracts will also reduce the receipt of illegal funds or errors in the transaction. According to Kim, the CBDC project may also be the standard in setting the regulatory directions for stablecoin — a type of cryptocurrency where its value is anchored to another asset class.

The goal of the CBDC project is not to create a cashless society, but to review an alternative payment system that may be more stable and useful, according to a spokesperson for the FSC. Its usage could grow if it proves to have a wider application.

“It is important to note that this project is part of the process of exploring an optimal CBDC design suitable for the Korean economic and financial situation,” the BOK said in a statement. “This project does not constitute any official introduction of a CBDC, and the design of the CBDC network established for this project does not imply any finalized design.”

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