South Korea prepares for CBDC pilot, digital transformation

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The Bank of Korea (BOK) has announced a plan to launch a central bank digital currency (CBDC) experiment to evaluate the feasibility of implementing the digital won.

Announcing the planned pilot on March 18, the central bank said the CBDC experiment will use real-world transactions to test the proposed digital currency. Participants will be able to convert their bank deposits to tokens and use them for payments at selected merchants.

The BOK is eyeing the participation of 100,000 individuals in the pilot program but made no mention of a proposed expansion to cover a wider demographic. The initiative is scheduled to begin in April and is expected to last until the end of June.

Apart from gauging public sentiments for a CBDC, the BOK is keen on exploring new settlement standards for commercial banks. Currently, local banks perform settlements using reserves with the central bank, but this system has several drawbacks.

The upcoming experiment will test the viability of a CBDC-based settlement system for banks using distributed ledger technology (DLT). If things go according to plan, the BOK will roll out a CBDC, and commercial banks can issue tokens linked to it for local payments.

During the pilot phase, consumers will be able to convert their deposits into tokens with the push of a button, a feature that the central bank is considering before the full commercial launch. However, this feature has garnered criticism over potential bank disintermediation and the associated revenue implications for financial institutions.

Aware of the challenges, the BOK will cap the amount of tokens that can be held by a participant at KRW1 million (US$689). Furthermore, the total amount of deposit convertible during the trial period is capped at KRW5 million (US$3,446).

The selected merchants include a mix of online and offline enterprises, including 7-Eleven, Silla University, and Hyundai Home Shopping.

“Through deposit token payments, merchants can receive settlement funds in real-time,” said a BOK spokesperson. “Additionally, related transaction fees are expected to be reduced by minimizing intermediary institutions in the payment process.”

South Korea has a well-developed local payments ecosystem, with the BOK studying CBDCs since 2020. Last year, the government ramped up efforts via a capital injection of $14 million for CBDC research following rising use cases to counter stablecoin risks.

In other developments, the country’s financial regulatory authority is considering integrating emerging technologies into its current operations to enhance transparency and improve efficiency.

The Financial Supervisory Service (FSS) has rolled out a three-year plan to improve the quality of its supervisory duties over the financial industry. The FSS disclosed the plans during the Financial Supervision Digital Transformation Launch Ceremony, eyeing a complete integration by 2027.

“In the era of digital transformation, the FSS must proactively understand the financial industry and market, systematically respond to risks, and actively lead change and innovation,” said FSS Governor Lee Bok-hyun.

Currently, FSS processes are heavily reliant on physical effort and are prone to error and innate human bias. The agency is transforming itself into a data-driven body to improve systems while upgrading to a smart workplace.

Lee says the FSS will set up systems for collecting data from financial service providers and enterprises to power its digital transformation.

“We aim to enhance the soundness and stability of the financial market by preparing a multidimensional and precise analysis environment for financial data, such as corporate credit and financial information, to identify risks in advance and respond proactively,” said Lee.

Under its digitalization drive, the FSS will overhaul operations with digital infrastructure, including introducing wireless network environments and business-use tablet PCs while gradually phasing out PDF formats for “machine-translatable format in sanction disclosures.

Utilizing artificial intelligence (AI) for automation and compliance verification purposes is also being discussed.

While complete digitalization of its services comes with numerous risks and challenges, the FSS says it remains resolute in achieving innovation in South Korea’s financial landscape.

The FSS has long been working on initiatives that would support the nation’s rapidly evolving financial ecosystem in South Korea. In 2023, it set the ball rolling with a digital currency disclosure system for investor protection and market efficiency.

As digital currency use reaches a fervent pitch, the FSS has increased its supervision over the industry, improving existing systems for non-fungible tokens (NFTs) and stablecoins. Across the board, South Korea is moving toward fully digitalizing its economy using CBDCs and AI integrations.

Watch: Finding ways to use CBDC outside of digital currencies