In a groundbreaking move, South Korea’s central bank is set to venture into the world of digital currency with the initiation of a pilot project for a central bank digital currency (CBDC). This forward-looking endeavor aims to explore the potential applications of CBDCs as a means of savings and transaction.
Announced in a joint statement by the Bank of Korea, local reports state that the Financial Services Commission, and the Financial Supervisory Service, this pivotal project will pave the way for the future of digital finance. Starting in Q4 2019, the pilot program will welcome non-financial institutions to partake in this innovative CBDC trial.
Kim So-young, Deputy Chairman of the Financial Services Commission, emphasized the issuance of tokens as a crucial component to test the infrastructure for future currency. This approach is poised to enhance the payment settlement system, fostering an ecosystem of payments through wholesale CBDCs and tokenized deposits, facilitating the transaction of digital assets such as security token offerings.
The Bank of Korea’s Vision
BOK Senior Deputy Governor Ryoo Sang-dai underscored the central bank’s commitment to innovation and adaptability in the face of economic changes. South Korea initiated CBDC exploration in 2021 to catalyze digital finance’s evolution and fortify the nation’s monetary foundation.
Commercial banks will soon employ CBDC for interbank cash transfers and final settlements among financial institutions, following the test’s launch this month, extending at least until the end of 2024. This mirrors existing practices where commercial banks utilize central bank reserves for such transactions. While CBDC holds promise for the general public, it is currently open only to commercial banks to ensure legal compliance. Plans are in motion for a subsequent test phase involving retail CBDC, anticipated to unfold in Q4 2019, pending technical readiness improvements.
Government Finance Reinforcement
CBDC implementation could bolster government finances significantly. It has the potential to track the use of funds, like pandemic relief money, ensuring they are allocated for their intended purpose and not misappropriated. The Bank for International Settlements (BIS) provided vital guidance in developing the CBDC network and associated technologies. This marks the first instance of BIS involvement in a CBDC pilot test within a nation.
South Korea’s impressive technological landscape, coupled with its diverse range of payment methods, made it an ideal partner for collaboration with BIS. The BOK, FSC, and FSS will conduct training sessions for IT system integrators and financial institutions in October, with project specifics slated for unveiling in November South Korean officials want to clarify that this trial does not signify an immediate embrace of the CBDC payment mechanism. Instead, it represents a calculated step towards understanding and harnessing the potential of digital currency in South Korea’s evolving financial ecosystem.
