Earlier this month, the Bank for International Settlements (BIS) and the Bank of Korea (BOK) released a report titled "A step toward new financial market infrastructure: Bank of Korea’s initiative". In line with BIS’ role in "fostering responsible innovation within the central banking community", the paper outlines its advice on Bank of Korea’s Central Bank Digital Currency (CBDC) pilot project.
BOK established a CBDC research group back in 2020 committed to ‘constructive and responsible innovation’. In recent years, there have been numerous experiments focused on retail CBDC and collaborations with commercial banks, designed to test a CBDC’s functionalities and lifecycle operations, from ‘minting, issuance, circulation, redemption and destruction’. By connecting BOK’s test CBDC system with commercial bank test servers, the ‘seamless performance’ of previous experiments affirmed the potential for real-world applications.
BOK’s new pilot project will take this a step further, to establish a CBDC network that will facilitate the issuance and circulation of digital currencies, including tokenised deposits and tokenised e-monies. The new project envisions a CBDC as ‘an anchor’ which enables ‘seamless exchanges’ between tokenised deposits and tokenised e-monies.
The project's key objectives are:
Redirecting the public’s interest in crypto assets towards a "more innovative, constructive, and responsible channel" (which seems a swipe at the chaos of DeFi and permissionless crypto-markets);
Supporting the integration of tokenisation into the realm of assets (in line with tokenisation being the current hot topic in blockchain);
Enhancing payment system efficiency by leveraging CBDC’s programmability; and
Realising the unified ledger suggested by BIS for interoperability
While the BOK will remain in charge of the development and implementation of the CBDC system, commercial banks will be granted "exclusive participation rights" to act as node operators and hold CBDCs for inter-bank settlements, as collateral or reserve assets. Commercial banks will also be able to issue digital currencies (type DC-I and DC-II as show in the above table), but they will need to comply with a "common technical standard" for interoperability.
The paper identified the following challenges and considerations for retail CBDC implementation in Korea:
CBDCs may lack notable advantages in light of Korea’s advanced payment infrastructure;
Widespread adoption of retail CBDC may lead to bank disintermediation;
Concerns over privacy infringement (something the Bank of England has put front and centre in their CBDC plans); and
Concerns of interoperability between banks’ independent systems and risks of a siloed financial infrastructure.
BOK's digital currencies have been designed and structured to comply with obligations imposed on regulated entities under current Korean financial services regulations to avoid the need for amendment of the Bank of Korea Act. Following the project, BOK and the Financial Services Commission (FSC) plans to review the legal status of the DC-I and DC-II currencies against existing and future regulations.
The BIS paper recognises the varied approaches taken by jurisdictions in regulating digital assets, noting the exclusion of deposits from the scope of Europe’s MiCA and Singapore’s distinguishing of tokenised deposits and stablecoins. In doing so, the paper suggests that there may be a need to construct a brand-new framework in the future, instead of retrospectively fitting digital currencies into existing regulations.
Although the BOl believes Korea does not immediately need a retail CBDC, it insists:
it is necessary to be prepared for scenarios in which…CBDC becomes necessary due to changes in the financial and economic landscape.
Korea’s approach makes sense in light of the continuing global decline in cash usage and the rise in use of digital economies. The Federal Reserve Bank of New York, the Central Bank of Brazil and numerous other countries, including Australia, are undertaking similar efforts to prepare for a future in which digitally native and programable money is an important feature of the economy.
Written by Steven Pettigrove, Michael Bacina and Kelly Kim