Why the Bank of Korea is Testing the 'Digital Won' [The Digital Won is Coming]③

Research on CBDC Initiated to Counter Private Crypto Assets
European Central Bank Aims for Final CBDC Launch by End of Next Year
Benefits Include Voucher Program Efficiency and Cross-Border Payment Improvements
However, Social Consensus on Privacy Issues Remains Crucial

As private crypto assets such as stablecoins gain attention as new payment methods in the digital era, central banks worldwide are accelerating research and development related to CBDC (Central Bank Digital Currency) to respond to private crypto assets.

If CBDC is introduced, positive effects are expected, such as more efficient operation of voucher programs provided by governments and local governments, and improvement of cross-border payments that previously required high fees. However, since there are many concerns about personal information protection and the deterioration of monetary policy efficiency, reaching social consensus is likely to be a prerequisite.

CBDC is a digital form of legal tender issued by central banks. The Korean won we currently use changes into an electronic form called digital won. Unlike crypto assets such as Bitcoin, which are issued by the private sector, CBDC is issued directly by the central bank, guaranteeing its legal status and stability. It simply transforms existing banknotes and coins into electronic form, holding the same value, and offers the convenience of being tradable through digital wallets, etc.

CBDC is divided into retail CBDC and wholesale CBDC depending on its scope of use and users. Retail CBDC is issued directly like cash and can be used by economic agents such as households and businesses in daily life. On the other hand, wholesale CBDC is similar to reserve funds. It is issued to financial institutions such as banks and used for interbank fund transactions and final settlements. South Korea is currently testing wholesale CBDC.

Decline in Cash Usage, Emergence of Stablecoins... Triggering Global CBDC Discussions

Central banks worldwide began discussions on CBDC triggered by the emergence of new technologies such as smartphones, big data, and artificial intelligence (AI). As digital transformation accelerated across all sectors of the economy and industry due to new technologies, the payment environment also changed. Since the late 2010s, the proportion of cash usage by households has steadily declined, while credit card usage has increased. Additionally, big tech companies like Kakao and Naver expanded their market share in the payment market through KakaoPay and NaverPay, monopolizing user data and increasing market dominance.

The emergence of stablecoins also triggered discussions on CBDC. Bitcoin, the first private crypto asset, appeared in 2009. However, due to its high price volatility, it was perceived more as a high-risk asset than currency. To address Bitcoin's limitations, stablecoins?crypto assets issued with a fixed value pegged to existing currencies such as the US dollar?emerged in 2014, with Tether being the first. Since then, various stablecoins like USD Coin (USDC) have appeared. In 2019, big tech company Facebook announced plans to launch the global stablecoin Libra, and last August, PayPal introduced the stablecoin PayPal USD.

If stablecoins become a common payment method, many risks are anticipated. Large-scale withdrawal crises (coin runs) may occur if asset price volatility increases. Also, if the banking sector's fund intermediation function weakens and demand for safe assets rises, monetary policy could face constraints. If stablecoins partially replace existing fiat currencies, they could threaten monetary sovereignty or cause illegal foreign currency outflows. Especially if big tech companies issue stablecoins, their market dominance could further strengthen. There is also the risk of misuse for tax evasion or money laundering. Therefore, central banks worldwide are accelerating related research and development to ensure that CBDC can serve as a countermeasure before stablecoins become common payment methods.

At the Bank of Korea's national audit on the 14th, Governor Lee Chang-yong responded to Rep. Cheon Ha-ram of the Reform Party's question, "Can CBDC realistically become a countermeasure to stablecoins?" by saying, "Although not a perfect substitute, one of the reasons for introducing CBDC is to make it an important alternative."

94% of Central Banks Worldwide Research CBDC... Europe Aims for Introduction by 2025

Currently, major countries such as the United States, Japan, and China are gradually intensifying their CBDC research and development. According to the Bank for International Settlements (BIS), as of 2023, 94% of central banks are conducting CBDC-related projects. Some emerging countries like the Bahamas and Nigeria have already introduced and are operating retail CBDC. The European Central Bank (ECB) reviewed introduction in 2019, went through investigation and evaluation stages, and is now in the preparation and implementation phase, aiming for final introduction by the end of 2025 at the earliest.

China began developing digital currency and electronic payments in 2014 and continues to actively pursue CBDC introduction. Japan also started technical development with CBDC pilot experiments in 2021. However, the United States has a somewhat lukewarm stance. Since starting research at the Federal Reserve in 2016, it has been preparing for introduction, but due to opposition related to personal privacy and security issues, research is progressing at a slow pace.

The Bank of Korea established a dedicated CBDC research team in 2020 and verified the technical feasibility of universal CBDC through pilot studies (August 2021 to June 2022) and linkage experiments with financial institutions (July 2022 to December 2022). Since then, it has focused on wholesale CBDC and is conducting related research such as CBDC usability tests (October 2023 to late 2024 (tentative)) and the Agora Project (from April 2024).

Resolving Cross-Border Payment Issues... Social Consensus is a Prerequisite

The functions and effectiveness of CBDC are expected to vary greatly depending on when and how it is introduced. Currently, the Bank of Korea is exploring the most suitable design and operational methods for CBDC in the Korean economy. Since CBDC is a public currency infrastructure, it is expected to have greater universality compared to existing cards or private payment services. Also, because real-time payments are possible, long settlement periods are unnecessary, and by utilizing programmable features such as distributed ledger technology, voucher programs provided by governments or local governments can be operated more efficiently. It is also expected to solve cross-border payment issues that previously involved complex procedures, regulations, long processing times, and high fees.

However, before introduction, reaching social consensus on technical, economic, and legal aspects appears to be a prerequisite. Concerns about security and personal information protection have been consistently raised regarding CBDC introduction. There are also concerns that CBDC could promote capital movement, intensify exchange rate volatility, and cause financial market instability due to reduced bank deposits and increased capital inflows and outflows. Clear definitions are needed on whether CBDC should be regarded as legal tender or simply as a digital payment method, and legal responsibilities and authorities regarding transactions and management must be clarified. Consumer privacy and data protection issues, which have been continuously raised in relation to CBDC, must also be resolved.

A Bank of Korea official said, "Concerns have mainly been raised regarding the weakening of banks' fund intermediation functions and personal information protection related to universal CBDC," adding, "Before deciding on CBDC introduction, sufficient prior review of these concerns must be conducted, and various safeguards should be established before actual introduction."