The Bank of Korea and the Financial Services Commission announced they will hold a trial run of its central bank digital currency (CBDC) among banks and other financial institutions.
The two agencies in partnership with the Financial Supervisory Service (FSS) announced on 4 October that the pilot will assess the viability of a future monetary system based on a wholesale CBDC. The Bank of International Settlement (BIS) will also be involved to give technical support during the project.
“The project will assess the feasibility of implementing the future of a monetary system based on ‘wholesale CBDCs.’ Commercial banks will utilize a wholesale CBDC for interbank fund transfers and final settlements among financial institutions,” the Bank of Korea said in a statement.
“By presenting a prototype model of a future monetary system that incorporates advanced information technology, this project is expected to lay the foundation for implementing various innovative payment and financial services that differentiate themselves from existing forms,” it added.
While both individuals and financial institutions will participate in the pilot, individuals will use the CBDC platform on a smaller scale in the fourth quarter of 2024. To test the wholesale CBDC, the banks will tokenize their deposits and circulate them in the network monitored by the BOK, the FSC and the FSS.
A Big Step Forward
CBDCs are becoming increasingly popular as more countries seek to maintain their financial sovereignty in the midst of wild crypto adoption. Many other countries are pursuing the idea of a centralized digital currency that gives the government absolute power to trace and control financial transactions.
According to the first deputy governor of the FSS Lee Myung-soon, the pilot is a major step towards South Korea achieving the goal of having a CBDC, even though the pilot doesn’t guarantee implementation.
“The BOK has persistently pursued technological research related to CBDC. This test, building upon past achievements, represents a significant step towards creating a prototype for the future monetary system.“
A top digital currency expert in South Korea, Moon Young-bae, confirmed that the pilot will focus on the wholesale CBDC and if launched, will affect stablecoins such as Tether USDT, USDC, and others.
“Korea’s plan is to test the wholesale CBDC first. The viability of the retail CBDC will be tested later next year with limits. The exact timeline is yet to be decided,” Digital Finance Research Institute chief Moon Young-bae told a local news outlet.
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“Once CBDC is launched, stablecoins will face a challenge. And for the full-fledged introduction of smart cities and a metaverse eco-system, CBDC will be a must,” Moon added.
The Criticism of CBDCs
CBDCs give the government power to manage financial transactions directly through the central bank. While governments may find this appealing, many experts have criticized CBDCs because of their potential to be used as instruments of control and surveillance.
For example because CBDC transactions are 100% traceable, they can be traced to the user with details such as what they used the money for. Because the money is also programmable, the government can potentially program it to be used only for certain kinds of transactions, which violates the user’s right to spend their money as they wish.
Going forward, more countries will subscribe to the idea, but it may be a long time before it becomes accepted among the citizens, like the case in Nigeria where only a tiny fraction of the population uses the eNaira despite years of existence.
