Bank of Korea: "Introducing Central Bank Digital Currency Can Prevent Tax Evasion"

[Asia Economy Reporter Kim Eun-byeol] An analysis has emerged suggesting that the introduction of a central bank digital currency (CBDC), which allows transaction tracking, can prevent tax evasion associated with cash usage.

On the 3rd, Kwon Oh-ik, Associate Research Fellow at the Bank of Korea Economic Research Institute, Lee Seung-duk, Assistant Professor in the Department of Economics at Sungkyunkwan University, and Park Jae-bin, Assistant Professor in the Department of Economics at the University of Mississippi, analyzed the impact of CBDC introduction on social welfare in the 'BOK Economic Research'.

CBDC is a central bank-issued currency in electronic form, separate from reserve deposits and settlement deposits. Unlike cash, it can pay interest and allows for transaction tracking by adjusting anonymity.

In this study, cash was modeled as allowing tax evasion on transactions, while CBDC was modeled as enabling transaction tracking for tax purposes. The government imposes a proportional transaction tax, and an independent central bank supplies both cash and CBDC while determining the inflation rate and the interest rate on CBDC. However, this study did not consider the effects of CBDC on other areas such as financial stability.

The analysis showed that introducing an interest-bearing CBDC improves resource allocation compared to an economy where only cash exists.

In particular, paying interest on CBDC increases its usage and the consumption of transactions that tax authorities can monitor. At the same time, consumption of tax-evasive transactions mediated by cash decreases, correcting resource allocation distortions and thereby increasing social welfare.

Associate Research Fellow Kwon explained, "In economies where tax evasion through cash transactions is severe, the introduction of CBDC can have positive effects." He added, "CBDC can provide anonymity similar to cash or less anonymity. It will depend on how CBDC is designed, and various studies will come together to produce the final design."

This content was produced with the assistance of AI translation services.