The Bank of Korea is ramping up efforts to develop its own Central Bank Digital Currency (CBDC). Central banks are looking into CBDCs because they fear private-sector tokens such as stablecoins might challenge traditional “fiat” currency.
The BOK signed a deal worth $7.45 million (9.68 billion won) with local IT service provider LG CNS to develop a system for CBDC trials on Dec. 18. The trials, which are expected to begin next year, involve wholesale CBDC for interbank transactions and banks issuing tokenized deposits. Some of the tests will be conducted on a large scale, allowing the general public to participate.
The BOK has been carrying out CBDC mock trials since August 2021, but this is the first time the central bank has partnered with a private company to conduct feasibility tests on wholesale CBDC. CBDCs are divided into wholesale and retail depending on the different needs of different users. Wholesale CBDC is designed to settle large-value interbank transactions, while retail CBDC is intended for general public use, allowing users to make everyday payments and transactions.
Korea’s central bank is working on developing CBDCs in response to the widespread adoption of stablecoins, which are digital currencies that are pegged to either fiat money, exchange-traded commodities or another cryptocurrency.
For instance, Tether (USDT) is a cryptocurrency stablecoin pegged to the US dollar, and is considered to be less volatile compared with other cryptocurrencies such as Bitcoin. Tether surpassed Bitcoin in 2019 to become the largest cryptocurrency in terms of trading volume.
In August this year, US-based payments company Paypal announced the launch of a dollar-denominated stablecoin called Paypal USD. PayPal’s foray into the stablecoin market is expected to prompt traditional players in the payment industry, such as banks and credit card companies, to consider introducing services that integrate cryptocurrencies.
The BOK does not want to lose out on the global CBDC race and jeopardize the position of the Korean won, according to people with knowledge of the matter. “Currently, transactions predominantly revolve around major currencies like the dollar, but in the cryptocurrency market, leadership may shift to other countries,” said a BOK official. “It is necessary to issue a CBDC to maintain the status of the won.”
The BOK is currently working on cross-border payments projects with the BIS (Bank for International Settlements) Singapore Innovation Hub.
“The digitalization of the economy is an inevitable trend,” said 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.”
