Bank of Korea: "Using Deposit Tokens Enables 'Real-Time Settlement' of Credit Card Payments" [Q&A]

Bank of Korea to Conduct Usability Test of 'Institutional CBDC'
"Convertible to Regular Deposits Anytime on CBDC Network"
Public Participation Experiment Scheduled for Q4 Next Year

The Bank of Korea explained that using deposit tokens offers advantages such as immediate receipt of funds and efficient payments compared to traditional deposits or other payment methods.

Kim So-young, Vice Chair of the Financial Services Commission (center), is speaking at the joint press conference 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.
From 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

On the 4th, the Bank of Korea, together with the Financial Services Commission and the Financial Supervisory Service, announced plans to promote a 'CBDC usability test.' The Bank stated, "Deposit tokens issued by banks on the CBDC network can be converted into the bank's regular deposits at any time," adding, "Innovative payment and settlement services can be easily implemented." For example, currently, when paying by credit card, it takes about three business days for the actual funds to be settled, but once deposit tokens are commercialized, payments can be received immediately.

The CBDC (Central Bank Digital Currency) usability test being prepared by the Bank of Korea involves issuing an 'institutional digital currency (institutional CBDC)' that can be used for interbank fund transfer transactions, and participating financial institutions will issue and use tokens linked to this as a payment method. In this test, the Bank of Korea will not issue CBDC directly to the public but only to banks, which will then issue and circulate deposit tokens to their customers based on this.

The Bank of Korea plans to disclose specific use cases for the actual test after consultations with participating banks and government and supervisory authorities, and plans to start a test involving the general public around the fourth quarter of next year.

Below are the main Q&A.

- Please explain what deposit tokens are.

▲ Deposit tokens (tokenized deposits) are digital assets similar to deposits issued by banks using distributed ledger technology based on institutional CBDC. In this test, deposit tokens are designed to be as close as possible to the characteristics of current demand deposits. Therefore, holders of deposit tokens can transfer them to others in a manner similar to current account transfers. On the CBDC network, a bank’s deposit tokens can be converted into that bank’s regular deposits at any time. Just as a securities account must be opened to trade stocks, a deposit token account must be opened to utilize programming functions.

- Under current law, can banks issue and circulate deposit tokens?

▲ The issuance and circulation of deposit tokens by participating banks will be temporarily permitted within the scope of the test through a financial regulatory sandbox. Additionally, the distributed ledger records and the transaction ledgers of participating banks will be synchronized to ensure there are no legal issues regarding users’ property rights.

- What are the advantages compared to existing deposits or other payment methods?

▲ △ Innovative payment and settlement services can be easily implemented through programmable functions such as smart contracts △ Dependence on intermediaries is reduced, lowering sellers’ payment fees and eliminating separate settlement processes, enabling immediate receipt of funds △ Tokenized asset transactions support safer and more efficient payments △ There is no concern about weakening deposit bases or credit supply capacity due to a decrease in bank deposits.

- What research has the Bank of Korea conducted on CBDC so far?

▲ From a technical perspective, the Bank has conducted simulations and experiments linked with financial institutions. Two years ago, it implemented CBDC functions in a virtual test environment and verified the applicability of IT new technologies. Last year, it checked the normal operation and performance of the CBDC simulation system in cooperation with 14 banks and the Korea Financial Telecommunications & Clearings Institute. This year, it signed an MOU with Samsung Electronics to collaborate on offline CBDC technology research and continues to advance related technologies. The Bank has also conducted in-depth reviews of institutional issues related to CBDC introduction, as well as its impact on monetary policy and financial stability through symposiums and conferences.

- Does this usability test mean the institutional CBDC will be officially introduced?

▲ No, this is an experimental study for research purposes and does not assume the actual issuance of institutional CBDC or private digital currencies.

- On what legal basis is the issuance of institutional CBDC possible?

▲ This test is conducted within the current legal framework without amending the Bank of Korea Act, for limited research purposes. The institutional CBDC in the test differs only in form but has the same function and nature as existing reserve money.

- What use cases will be tested? Can the general public participate?

▲ The focus will be on implementing and verifying innovative functions of digital currency that differentiate it from existing payment services rather than simple fund transfers. Real transaction tests involving the general public will be conducted in the fourth quarter of next year. Considering compliance with current laws, some use cases based on deposit tokens will be conducted with restrictions on duration, amount, and number of participants.

- Can digital currency be transferred to other distributed ledgers like Ethereum?

▲ No. The Bank of Korea’s CBDC system is built using a permissioned distributed ledger and will not be linked to external open distributed ledger networks. Users participating in the real transaction test cannot transfer digital currency issued on the CBDC network to open distributed ledgers such as Ethereum.

- Will personal information be safely protected during tests involving actual users, and are there protections in place if problems occur?

▲ The Bank will establish and review a personal information protection system based on current laws such as the Personal Information Protection Act in cooperation with relevant government ministries. The Bank of Korea does not have the authority to view bank customers’ personal information. Personal information such as customers’ real names will be separately stored by participating banks and designed so that the central bank cannot access it. Participating banks will protect personal information using encryption technologies and will only access individual transaction records within the scope and purpose agreed upon by customers.

The Bank plans to thoroughly prepare from the system construction stage to prevent user inconvenience and damage caused by failures or hacking. Especially before starting real transaction tests involving the general public, sufficient prior testing and inspections will be conducted. The Bank will jointly conduct detailed institutional reviews with the Financial Services Commission and the Financial Supervisory Service to prevent user harm and establish a close cooperation system among related agencies for prompt response.