In a groundbreaking move, the Bank of Korea (BoK) is embarking on a pivotal journey to explore the realm of Central Bank Digital Currencies (CBDCs) in collaboration with the Bank for International Settlements (BIS) and various financial institutions. This transformative initiative, announced recently, sheds light on South Korea’s endeavour to shape monetary systems’ future by assessing wholesale CBDCs’ feasibility.
South Korea, renowned for its technological prowess, has joined the league of countries venturing into CBDC pilot programs. The Bank of Korea (BoK) is at the forefront of this endeavour, aiming to develop the technical infrastructure for CBDCs. The joint announcement on this pioneering project was made in conjunction with the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), signifying a holistic approach towards reshaping the financial landscape.
The pilot programme will encompass retail and wholesale CBDCs, with expert technical support provided by the BIS, further strengthening the endeavour’s foundation. Wholesale CBDCs, the primary focus of this experiment, are envisioned as a tool to transform interbank fund transfers and final settlements among financial institutions.
Under the experimental framework for wholesale CBDCs, banks will tokenise their deposits, thereby facilitating their circulation within a network under the vigilant supervision of the BoK, FSC, and FSS. However, it’s essential to clarify that this pilot does not guarantee the inevitable implementation of CBDCs. Nonetheless, it signifies a monumental step towards crafting a prototype for a future monetary system, as affirmed by Lee Myung-soon, the First Deputy Governor of the FSS.
The distinction between retail and wholesale CBDCs lies in their target audience and intended use cases. Wholesale CBDCs are designed to serve financial institutions, enabling smoother interbank transactions, whereas retail CBDCs are accessible to the general public. South Korea has already conducted trials of retail CBDCs but concluded that they are currently unnecessary due to the efficiency of the Korean payment landscape. Nevertheless, the nation is keen to be prepared for potential CBDC adoption in the future.
This initiative also coincides with the development of the BIS’s Unified Ledger concept, a visionary blueprint integrating CBDCs, digital money from commercial banks, and tokenised assets into a single, programmable network. By implementing smart contracts, the Unified Ledger concept addresses supply chain financing challenges, such as delayed payments and supplier pre-production financing.
The urgency to research and develop digital financial infrastructure intensifies as the world progresses towards a digital economy. South Korea joins the ranks of nations at the forefront of this revolution. While developing countries like Nigeria and the Bahamas have already adopted general-purpose CBDCs, China is aggressively expanding its pilot systems, and the European Union is paving the way for a digitalised euro.
Global central banks closely monitor the Bank of Korea’s CBDC pilot project, thanks to its collaboration with the BIS. The project leverages BIS expertise and allows the international community to learn from South Korea’s experience running a wholesale CBDC project in a highly developed and digitised economy.
In conclusion, South Korea’s move towards CBDCs is not just a technological experiment but a significant stride towards the future of the monetary system. While it may not guarantee immediate implementation, it represents a commitment to exploring the optimal CBDC design tailored to Korea’s unique economic circumstances. The world watches as South Korea, in collaboration with the BIS, pioneers this transformative journey into wholesale CBDCs.
