The Bank of Korea (BOK) is intensifying its efforts to advance the development of its Central Bank Digital Currency (CBDC), as central banks globally explore CBDCs in response to concerns that private-sector tokens, particularly stablecoins, could pose challenges to traditional fiat currency.
The BOK entered into a $7.45 million (9.68 billion won) agreement with local IT service provider LG CNS to collaborate on developing a system for CBDC trials. These trials, scheduled to commence next year, will involve wholesale CBDC for interbank transactions and the issuance of tokenized deposits by banks. Some of the tests will be conducted on a large scale, enabling public participation.
While the BOK has been conducting CBDC mock trials since August 2021, this marks the first time the central bank has joined forces with a private company for feasibility tests on wholesale CBDC. CBDCs are categorized as wholesale or retail based on the varied needs of users. Wholesale CBDC settles large-value interbank transactions, while retail CBDC is intended for general public use, facilitating everyday payments and transactions.
The move by Korea’s central bank to develop CBDCs is a response to the growing adoption of stablecoins, digital currencies pegged to fiat money, exchange-traded commodities, or other cryptocurrencies. Notable stablecoins include Tether (USDT), pegged to the US dollar, which surpassed Bitcoin in 2019 in terms of trading volume.
In August of this year, U.S.-based payments company PayPal introduced a dollar-denominated stablecoin called Paypal USD, signaling the potential for traditional players in the payment industry, including banks and credit card companies, to consider integrating cryptocurrency services.
The BOK, keen not to fall behind in the global CBDC race and to safeguard the position of the Korean won, is working on cross-border payments projects with the Bank for International Settlements (BIS) Singapore Innovation Hub.
“The digitalization of the economy is an inevitable trend,” stated BOK Governor Rhee Chang-yong. “Central banks must prepare for the new digital environment by competing with the private sector rather than sitting idly by.”
