South Korean financial authorities have announced details of a major new central bank digital currency (CBDC) initiative described as ‘representing the initial step in the development of a future monetary system for Korea’.
The Bank of Korea (BOK), Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) made a joint-announcement to kick off the ‘CBDC pilot project’ – a programme receiving ongoing technical input from the Bank for International Settlements (BIS).
The East Asian country’s central bank has already conducted various CBDC experiments, with a focus on exploring a retail CBDC (a CBDC for general population use). The newly announced initiative is focused on developing underlying wholesale (interbank) CBDC infrastructure, specifically mining the concept of a so-called ‘unified ledger’ first detailed by the BIS earlier this year.
Like many other nations’ stances as regards CBDC, the Korean authorities emphasise that the project does not constitute the ‘official introduction’ of a CBDC. Instead it is ‘part of the process of exploring an optimal CBDC design suitable for the Korean economic and financial situation’.
A joint-report, ‘A step toward new financial market infrastructure: Bank of Korea’s initiative’, has been published by the BOK and BIS. This specifies four overarching objectives, including – at a general population level – deflecting Koreans’ ‘considerable interest’ in crypto-currencies, as well as providing technical details.
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DLT-based ‘CBDC network’
BIS general manager Agustín Carstens spoke of a unified ledger in a speech (‘Innovation and the future of the monetary system‘) in Singapore in February. The concept was then detailed in a special chapter of BIS’s annual economic report for 2023, which was published in June.
‘The pilot explores an architecture that aims to reap the full benefits of tokenisation… it is therefore essential that central bank money is the basis of any ecosystem based on tokenised claims,’ the foreword to the BOK-BIS joint-report states.
‘CBDC provides a tokenised representation of the unit of account and is essential for maintaining the singleness of money,’ the 25-page publication’s foreword continues. ‘A financial market infrastructure underpinned by central bank money, such as the concept of a unified ledger, does not imply a sole ledger that overshadows all other systems in the economy. A key aspect of the Bank of Korea project is its broad systemic scope, which encompasses a central bank-operated core infrastructure and satellite interconnected systems operated by other entities. This interconnection provides the functionality needed for a wide variety of use cases, making the platform more flexible and open to market developments.’
During the pilot programme commercial banks will use a wholesale CBDC for interbank funds transfers and final settlements among financial institutions, similar to their current practice of using deposits (reserves) in their current accounts at the BOK to facilitate such transactions. They will then issue payment instruments in the form of tokenised deposits that will be accessible to the general public within a ‘CBDC network’.
The CBDC network will use distributed-ledger technology (DLT) and be jointly-managed by the BOK, FSC and FSS. These payment instruments will be circulated securely within the CBDC network, the joint-announcement states.
In respect of the four objectives, the first is to ‘redirect the public’s considerable interest in cryptoassets toward more innovative, constructive and responsible channels’. The report acknowledges that Koreans are ‘widely known for their active involvement in crypto trading’.
‘Furthermore, there exists an active interest and significant investment in the field of blockchain technology from both large enterprises and start-ups,’ the report continues. ‘The CBDC project is anticipated to serve as a testing ground for financial institutions to implement innovative payment and financial services on the Bank of Korea’s infrastructure and assess their effectiveness.’
The second objective is to ‘support the integration of the emerging concept of tokenisation into the realm of assets’ and the third objective ‘encompasses exploring and assessing a means to significantly enhance payment system efficiency by introducing programmable digital currencies issued by banks’.
‘The distinctive feature of digital currencies lies in their programmability,’ explains the report. ‘Nevertheless, it remains uncertain which specific services can be realised and to what extent payment efficiency can be improved through this inherent programmability, as opposed to conventional payment methods. This project aims to garner more definitive insights by applying programmable currencies to specific use-cases.’
The fourth objective ‘lies in the realisation’ of the BIS-proposed unified ledger concept. ‘Although issuing and circulating all tokenised assets on a single network operated by the Bank of Korea may be impractical, there is still a need to prevent the adverse effects of fragmentation that could occur if individual banks or operators of tokenised asset networks independently establish their own systems,’ it states. ‘The CBDC network, which is designed to empower commercial banks to issue digital currencies and ensure secure, instant and simultaneous asset settlement on an external platform, could be viewed as a variation of the unified ledger concept.’
Retail CBDC explorations ongoing
A procedure for selecting an ‘IT system integrator for system development’ is now underway, with interested parties being directed to the ‘Korea On-line E-Procurement System’. Briefing sessions for IT system integrators and banks are being held throughout this month (October).
The BOK, FSC and FSS are also planning to establish a working group with authorities including the Ministry of Economy and Finance (MOEF) and related institutions.
The three authorities plan to disclose further project details, including use-cases to be explored and a list of participating banks, at the end of November.
A testing stage involving the general public in the country – which has a population of just over 50 million and whose capital city is Seoul – is expected to start around the fourth quarter of 2024.
Any decision to expand the project’s scope will be made ‘after a comprehensive review of relevant issues such as accessibility’, according to the joint-announcement.
There are also plans to conduct ‘advanced research’ into important technological aspects of retail CBDC in parallel with the pilot project. This research will include areas such as offline transactions and privacy-enhancing technologies. The Bank of Korea signed a memorandum of understanding (MoU) in May with Samsung Electronics to ‘strengthen research’ into an offline CBDC.
BOK’s ‘Project Mandala’ involvement
The BOK, which established a dedicated CBDC research unit in 2020, is also part of a recently announced collaboration with the BIS Innovation Hub’s Singapore centre called ‘Project Mandala’.
This project is exploring the feasibility of encoding jurisdiction-specific policy and regulatory requirements into a common protocol for cross-border use cases such as foreign direct investment, borrowing and payments.
The Reserve Bank of Australia, Central Bank of Malaysia and Monetary Authority of Singapore, as well as financial institutions, are also involved in this project.
‘The envisioned compliance-by-design architecture could enable a more efficient cross-border transfer of any digital assets including CBDCs and tokenised deposits. It could also serve as the foundational compliance layer for legacy and nascent wholesale or retail payment systems,’ BIS states in a project webpage.
In respect of the new BOK initiative, BIS states that it is ‘looking forward to learning from the implementation of this ambitious project’.