BOK, FSC, and FSS Begin Full-Scale Development of Institutional CBDC... Public Participation Scheduled for Q4 Next Year (Comprehensive)

Announcement of Plan to Promote 'CBDC Utilization Testing'

Kim So-young, Vice Chair of the Financial Services Commission (center), is speaking at the joint press conference on the plan to promote the usability test of CBDC held on the afternoon of the 4th at the Bank of Korea Integrated Annex in Jung-gu, Seoul.
From the left, Yoo Sang-dae, Deputy Governor of the Bank of Korea, Vice Chair Kim, and Lee Myung-soon, Senior Vice Chair of the Financial Supervisory Service. Photo by Joint Press Corps

The Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service are jointly conducting an experiment in collaboration with the Bank for International Settlements (BIS) to build future currency infrastructure. This experiment is being carried out to explore the optimal design model of central bank digital currency (CBDC) suitable for Korea's financial and economic conditions, amid the increasing intensity of CBDC research and development by major countries.

In particular, this experiment is a public-private joint project involving not only the three institutions but also multiple banks. Analysts note that this marks a step forward in CBDC utilization, as the institutions cooperate to establish a CBDC network for issuing and distributing institutional CBDCs and private digital currencies.

On the 4th, the Bank of Korea held a joint press briefing with the Financial Services Commission and the Financial Supervisory Service to announce the plan to promote the 'CBDC Usability Test' with these details.

From Retail to Institutional Testing Begins in Earnest

CBDC refers to a new form of digital currency issued by a central bank. Depending on the scope of use and users, CBDCs can be implemented as retail or wholesale. Previously, the Bank of Korea conducted simulation research (August 2021 to June 2022) and 'linkage experiments with financial institutions' (July 2022 to December 2022), focusing mainly on retail CBDCs, conducting multifaceted research and development on technology, legal and institutional issues, and ripple effects.

This CBDC usability test will focus on 'institutional CBDCs' used for fund transactions and final settlements between financial institutions. This is similar to how banks currently perform fund transactions and final settlements using deposits (reserve funds) in accounts opened with the central bank.

Banks will provide digital payment means (tokenized deposits) usable by the general public within the 'CBDC network' built by the Bank of Korea using distributed ledger technology. The CBDC network consists of the CBDC system and external linkage systems, and within this network, institutional CBDCs and three types of private digital currencies (deposit tokens, e-money tokens, and special payment tokens) will be issued.

These payment means will circulate within the new currency infrastructure established by the Bank of Korea and jointly managed with the Financial Services Commission and the Financial Supervisory Service.

The selection process for system developers will begin today, and detailed information can be found on the Korea ON-line E-Procurement System (www.g2b.go.kr). An explanatory session for system developers and banks is planned for October. The Bank of Korea, Financial Services Commission, and Financial Supervisory Service will disclose detailed information such as specific use cases and participating banks by the end of November, and the general public participation test will commence around the fourth quarter of next year after preparations such as system construction.

This test will not only include technical experiments in a virtual environment like proof of concept but also provide opportunities for the general public to participate in some use cases of the test in a limited manner to directly experience the utility of new digital payment means.

Banks Participate First... Real Transaction Tests by Issuing 'Deposit Tokens'

The Bank of Korea, Financial Services Commission, and Financial Supervisory Service have also conducted thorough discussions on institutional aspects during the test preparation process. Considering consistency with current laws, only banks will participate in this test, and real transaction tests for some use cases will utilize only 'deposit tokens.' Whether to expand the test stepwise will be decided later after comprehensively reviewing related institutional issues following this test. The three institutions plan to continuously monitor related matters to ensure that real transaction tests involving the general public are conducted under sufficient user protection measures within the current legal framework.

Regarding actual use cases of deposit tokens, Yoon Sung-kwan, head of the Digital Currency Research Department at the Bank of Korea, explained, "They can be used to ensure transparency of donations or to restrict the use of disaster relief funds to consumption purposes," and added, "In the process of used car sales, simultaneous transfer of ownership and funds becomes possible, solving issues such as contract non-fulfillment." Furthermore, they can be used for efficient execution of fiscal policy. For example, when disaster relief funds are saved instead of spent on consumption, the effect of fiscal execution decreases, but if paid in the form of CBDC, consumption can be restricted, enhancing the effectiveness of fiscal execution."

Yoo Sang-dae, Deputy Governor of the Bank of Korea, is speaking at the joint press briefing on the plan to promote the CBDC usability test held on the afternoon of the 4th at the Bank of Korea Integrated Annex in Jung-gu, Seoul. Photo by Joint Press Corps

In particular, the Bank of Korea emphasized that this CBDC usability test is being conducted in close cooperation with the BIS. According to the Bank of Korea, the BIS actively shared research and development experience related to future currency systems such as CBDCs from the early preparation stages of the test. Experts from the BIS Innovation Hub and Monetary and Economic Department provided technical advice on the design and construction plan of the 'CBDC network.' Based on prior discussions, a joint report including the significance of the test and detailed design models was also published. Director Yoon stated, "While the BIS cooperates with several other countries, to my knowledge, it has never been involved up to the pilot test stage."

The three institutions will form a working-level consultative body with related ministries such as the Ministry of Economy and Finance and affiliated organizations to ensure smooth progress of the test and will continue technical cooperation with the BIS.

Lee Han-nyeong, director of the Financial Settlement Bureau at the Bank of Korea, said, "The reason BIS chose Korea is that our country is an IT powerhouse and has a favorable environment for experiments with various 'pay' methods widely used from the payment means perspective," adding, "Cooperation with the BIS can be helpful in terms of future international CBDC leadership."

The Bank of Korea added, "This test is expected to lay the foundation for implementing various innovative payment and financial services differentiated from existing services by presenting a pilot model of future currency infrastructure reflecting IT technological advancements," and further stated, "It can also contribute to establishing ways for new types of financial products, such as tokenized securities, to be traded efficiently through safer payment means."

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