The Bank of Korea (BoK) has confirmed initial plans to experiment with a wholesale central bank digital currency (CBDC), partnering with local and international entities for the most viable strategy.
In an official document, the BoK announced that it will join forces with the Bank for International Settlements (BIS) for its wholesale CBDC project. The central bank stated it will explore the possibility of building a new monetary system hinging on wholesale CBDC for interbank exchanges.
A study’s core feature will test wholesale CBDCs’ suitability as commercial bank tokenized deposits while probing their programmability.
On the domestic front, the BoK disclosed that it would collaborate with the Financial Services Commission (FSC), specifically the Financial Supervisory Service (FSS), in developing a wholesale CBDC. Both entities are expected to jointly release a CBDC usability test promotion plan in the coming weeks.
“The BoK has persistently pursued technological research related to CBDCs,” said FSS First Deputy Governor Lee Myung-soon. “This test, building upon past achievement, represents a significant step towards creating a prototype for the future monetary system.”
The banking regulator is eyeing several perks for the local payments ecosystem through a wholesale CBDC. Preliminary reports suggest that a blockchain-based CBDC system can potentially reduce settlement times and costs between financial institutions.
There is the added benefit of deploying the wholesale CBDC for cross-border payments, with the BIS expected to lead efforts in that regard. Already, the BIS has a significant wealth of experience in conducting cross-border payment experiments with Project Icebreaker and the mCBDC pilot, netting impressive results.
The BIS may leverage its participation in South Korea’s CBDC to test its unified ledger concept, which will link CBDCs, tokenized assets, and digital currencies under a single network. The unified ledger proposal is expected to lean heavily on smart contracts to stifle free-riding, ensuring that participants contribute to the network equally.
Grim prospects for a retail CBDC
The BoK has been experimenting with a retail CBDC version, launching a phased pilot to test the real-world application of the offering. The central bank expanded the pilot to the cities of Jeju, Incheon, and Busan, but challenges threaten the future of the offering.
The bank highlighted that a retail CBDC faces a stiff challenge in competing with existing domestic micropayment service providers. There is also the need to bolster the staff strength of the central bank to meet the increased demand of running a pilot spanning multiple cities.
“While there is no immediate need to issue a CBDC in Korea, we believe there is a strong case for us to be prepared for the potential introduction of a CBDC in the future,” said the BoK.