The Bank of Korea will test its CBDC

Today, the Bank of Korea announced the launch of an experiment, together with the Financial Services Commission and the Financial Supervisory Service, to field test a Korean CBDC. 

The BIS (Bank for International Settlements) will also participate in the experiment by providing technical advice for the preparation of the test.

The Bank of Korea’s CBDC

The Bank of Korea is the central bank of South Korea, and the CBDC it will be testing is the digital version of its national currency, the South Korean won (KRW). 

According to the Bank’s official website, the CBDC will be used to maintain the safety and efficiency of payment and settlement systems.

It will be a digital form of the national public currency and will be used in particular for cross-border payments and other financial applications. 

They also note that the development of a CBDC is a complex process that requires a lot of planning and coordination between the various stakeholders involved, such as government agencies, financial institutions and technology companies, and generally takes several years before it is finally launched in the markets. 

Therefore, the test that will be launched will only be a preparatory step to verify its potential and possible problems, within a long process that started some time ago with the so-called proof of concept and is expected to continue for some time. 

Moreover, the pilot project will also involve some private banks, making it a mixed public-private project.

Retail and wholesale

The Bank of Korea will test both retail and wholesale CBDC. 

In particular, it will test the tokenization of bank deposits so that wholesale CBDC can be used to circulate funds within the banking network supervised by the central bank itself and the country’s other financial authorities. 

While only the wholesale test will start soon, the retail tests are expected to start after the completion of the wholesale test, i.e. in the fourth quarter of 2024.

The wholesale test will focus on the funding of interbank transactions using deposits on accounts opened by commercial banks with the central bank itself.

The infrastructure of the Bank of Korea’s new CBDC

It should be noted that while this is obviously not a blockchain-based project, it will still be based on distributed ledger technology, but owned by the Bank of Korea. 

This will allow, for example, for the issuance of exchange tokens representing the funds deposited by banks with the central bank, which will presumably be exchanged to speed up interbank transactions and make them cheaper. 

The CBDC’s new currency infrastructure will be managed jointly with the Financial Services Commission and the Financial Supervisory Service.

Even the infrastructure on which the pilot will be based is considered to be only a pilot model for the creation of a future digital currency infrastructure. In other words, nothing that exists today should be considered definitive. 

The pilot will take place in a virtual environment, a true proof of concept (PoC).

The aim is to lay the foundations for the implementation of financial services in the digital environment.

The test process

Initially, only banks will participate in the test. 

At the end of this initial test, the Department will undertake a full review of the institutional issues involved before deciding whether to proceed.

The field test will need to provide sufficient user protections within the legal system to be considered successful. 

It is therefore not certain that a full-scale implementation of a CBDC in South Korea will be achieved, nor is it certain that this network will actually be used. 

Rather, the test will be used to fine-tune the final design model, on the basis of which it will be decided whether or not to launch the CBDC in the markets. 

However, by the end of October, the Bank of Korea plans to hold an information session for companies and banks developing payment systems. 

Details of the process will be announced at the end of November.

The test will be an important step in creating a prototype of the future currency system.

The success of CBDCs

So far, there have been no cases of truly successful projects related to the introduction of native digital currencies issued by central banks. 

On the contrary, where attempts have been made to launch CBDCs in some countries, the results so far have been poor or even negative. 

However, the Bank of Korea’s approach of clearly distinguishing between wholesale and retail use may prove to be a strength. 

Indeed, many of the reasons why people doubt the benefits of using a currency whose transactions are all controlled by the central bank fall away at the interbank level. 

It is therefore possible that the wholesale test will produce positive results, while at the same time it remains possible that future retail tests will produce much less interesting results. 

In China, for example, a local CBDC has been tested in the retail space for years, with poor results to say the least. 

On the other hand, tokenizing bank funds to make interbank exchanges faster and cheaper is something that several banks have been working on for some time, so it is unlikely that they would resist a similar system based on a state-owned CBDC. 

South Korea’s seems to be the most promising experiment in new central bank digital currencies to date.