South Korea Digital Currency Government Control? Directly Asked the Designer "Absolutely Impossible" [Issue Interview]

Interview with Lee Jongryeol, Deputy Governor of the Bank of Korea
The Core of Korea's Digital Currency is the 'Two-Track System'... No Access to Personal Data
Digital Currency Only Between the Bank of Korea and Banks, Deposit Tokens Between Banks and Individuals
After Successfully Completing the 'World's First' Pilot Operation
Plans to Expand Peer-to-Peer Transfers and Diversify Voucher Programs

"The Bank of Korea does not issue digital currency directly to individuals. It's not that we can see it but choose not to; structurally, we cannot look into it."

On the 2nd, at the Bank of Korea's 15th floor office in Jung-gu, Seoul, the office of Deputy Governor Lee Jong-ryeol was filled with various publications and research materials related to digital currency. This is understandable, as Deputy Governor Lee has been leading research on digital currency issued by the Bank of Korea since 2017, when Bitcoin surged and the whole world was abuzz. After about eight years, the Bank of Korea's digital currency, now dressed as an 'institutional digital currency,' began a pilot test called 'Project Hangang' for the general public starting from the 1st.

Lee Jong-ryul, Deputy Governor of the Bank of Korea, is giving an interview to Asia Economy at the Bank of Korea in Jung-gu, Seoul.

Bank of Korea Digital Currency, Destination is 'Institutional Use'... Personal Information Issues Fundamentally Blocked

The digital currency envisioned by the Bank of Korea over eight years has changed form multiple times. Initially, it was a 'general-purpose digital currency' issued directly by the central bank to individuals, similar to the model in China where the central bank transacts directly with individuals. Experiments linking financial institutions were conducted in this manner, but ultimately the direction was completely changed. This was because various side effects were discovered during the research process. One concern was the control of personal information. Deputy Governor Lee said, "It is true that some other countries' general-purpose digital currencies have controversies related to personal information protection." Besides personal information issues, there were risks such as a 'digital bank run' where bank deposits could rapidly shift to general-purpose digital currency during financial crises, and the risk of deposit concentration in general-purpose digital currency weakening banks' deposit bases, which could not be ignored.

The direction was changed to the institutional digital currency now undergoing pilot testing. The core idea is that 'digital currency issued by the Bank of Korea is handled only by institutions,' and research has been ongoing since 2023 in collaboration with the Bank for International Settlements (BIS). Banks were chosen as the institutions between the Bank of Korea and individuals because there is already social trust regarding the handling of personal financial information. The Bank of Korea and banks exchange digital currency, and banks and individuals exchange deposit tokens in a 'two-track' system. Deputy Governor Lee said, "In this 'Project Hangang,' digital currency and deposit tokens maintain the current 'two-tier monetary system' while only the underlying IT system has changed. I want to emphasize once again that there is no possibility of the Bank of Korea or the government looking into personal information."

The digital currency issued by the Bank of Korea is a kind of 'reserve token' that moves only between the Bank of Korea and banks. Individuals conduct various financial activities, including buying and selling goods with deposit tokens between banks and individuals, just like existing bank transactions. Deputy Governor Lee said, "Currently, citizens deposit money in multiple banks, and banks manage customer information through identity verification. The Bank of Korea cannot look into this, nor does it have any reason to, as it is responsible for monetary policy. Similarly, in this digital currency system, personal identity information that can identify transaction details by customer is designed not to be shared with the Bank of Korea or other banks." This means that, as before, personal information cannot be accessed under the Personal Information Protection Act and the Credit Information Act.

Lee Jong-ryul, Deputy Governor of the Bank of Korea, is giving an interview to Asia Economy at the Bank of Korea in Jung-gu, Seoul.

Active Competition for Virtual Asset Leadership Among Countries and Industry... "An Unavoidable Reality, Need for Proactive Response"

Why is the Bank of Korea pushing for the introduction of digital currency while dispelling misunderstandings? Deputy Governor Lee believes that considering the spread of virtual assets such as stablecoins and the swift responses by various countries, it is necessary to respond proactively to lead the direction rather than becoming a latecomer in this major change. He said, "Cryptographic assets have already established themselves as an investment asset, and existing real and financial assets such as government bonds and securities are also being circulated on token-based platforms, so external conditions are changing. This is an unavoidable reality." He added, "Not only to secure digital currency sovereignty as a non-reserve currency country, but also to enhance synergy in a situation where various assets are circulated on token-based platforms, the currency and payment infrastructure supporting transactions must also be built on token-based platforms, making introduction necessary."

From the user's perspective, the strengths of institutional digital currency include safety, openness, and programmability. He explained, "The strength from the user's side is that it is a payment method safely operated within regulatory frameworks, and once an electronic wallet is opened, deposit tokens can be used anywhere and to anyone regardless of the bank." Although not included in this first test phase, if programmability is activated, various uses are possible, such as parents sending allowance to children with deposit tokens while specifying stores and items like books and stationery. At the merchant level, immediacy and low cost are major advantages. He said, "During the COVID-19 outbreak, disaster relief fund card fees reached 200 billion won, all borne by merchants. Using deposit tokens, the number of intermediaries is small, so fee costs are structurally lower. For small business owners, the fact that payments are made in real-time without separate settlement procedures is also a strength." In the future, when peer-to-peer transfers become possible, small business owners could receive payment for goods and services through bank deposit tokens without signing contracts with card or pay merchants.

Lee Jong-ryul, Deputy Governor of the Bank of Korea, is giving an interview to Asia Economy at the Bank of Korea in Jung-gu, Seoul.

The initial response to the world's first institutional digital currency pilot test, which started on the 1st, has exceeded expectations. Among the seven participating banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, IBK Industrial Bank, BNK Busan), some banks saw recruitment numbers about twice the planned amount, showing greater interest than expected. Deputy Governor Lee said the first goal is to successfully complete the three-month test. He said, "From April to June, the number of participating stores is limited, and since it is still a test phase, there will inevitably be inconveniences from signing up to usage, but continuous improvements will be made." He added, "Participating banks and merchants have prepared discount events and giveaways, such as 10% discounts at convenience stores (7-Eleven), and the Bank of Korea has also prepared promotional events, so please make full use of them and provide feedback."

Soon, a second test, addition of peer-to-peer transfers, diversification of voucher programs, and expansion of use cases will be pursued. Deputy Governor Lee emphasized, "As someone who has been in charge of payment and settlement operations at the Bank of Korea for a long time, I can confidently promise that no matter what technology emerges in the future, the Bank of Korea will prioritize trust and stability of currency and financial systems at the center of our country's payment and settlement system."