South Korean banks explore stablecoin alternatives as CBDC research picks up steam

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As stablecoins face heightened scrutiny from regulators, South Korean banks are in the race for a worthy alternative as they prepare for a central bank digital currency (CBDC).

Hana Bank is throwing its weight behind the novel certificate of deposit (CD) tokens, according to local news outlet Pulse News. Woori Bank, a Seoul-based commercial bank, also confirmed an interest in CD tokens with the release of a report indicating the possibilities of relying on them over stablecoins.

CD tokens are tokenized deposits of funds held in bank accounts minted using blockchain technology. The report quotes several sources who note that the CD tokens will replace traditional deposits without any major disruptions to the current financial system in place.

Both commercial banks acknowledge that CD tokens offer greater investors’ protection than stablecoins since they operate using the same identity verification standards.

“CD tokens are perceived as stable from the banks’ perspective since they do not differ significantly from the current system,” read Woori’s report.

Apart from their stability, commercial banks are leaning on CD tokens for their seamless integration with CBDCs. Woori Bank’s report noted that transactions involving CD tokens would be settled using central bank-issued CBDCs for increased transparency and reliability.

The plans stemmed from the Bank of Korea’s decision to introduce CBDCs into the payment system. In a statement, the Bank of Korea said it will investigate offline payment using near-field communication (NFC) and cross-border payments to increase the public interest in the CBDC.

Although the pilot program has recorded early wins, the report indicated several nagging technical issues, including slower processing times when operating at its maximum capacity—regulators currently eye stablecoins with skepticism following the implosions of some of the largest stablecoins in 2022. South Korea was the hardest hit after TerraUSD (UST) de-pegged from the U.S. dollar, leading to the loss of funds running into billions of dollars.

The state of stablecoins in South Korea

To avoid a repeat of the de-pegging of UST, South Korea’s Legislature moved to roll out legislation to regulate the sector. According to the bill, stablecoin issuers will require the express permission of the Financial Services Commission (FSC) to launch their products.

The South Korean central bank is seeking an increase in its supervisory powers over stablecoin issuers on the grounds that stablecoins are a threat to the country’s financial stability.

Following a legislative amendment in May, the Bank of Korea and the FSC will share supervisor powers over stablecoin issuers as the country moves to put a tight leash on the virtual currency industry.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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