Stablecoin hype dims BOK's CBDC ambition
South Korea is poised to take a major step in digital finance with the push for a stablecoin tied to the Korean won. But as enthusiasm for private-led innovation grows, the Bank of Korea's central bank digital currency project appears to have lost steam.
The shift underscores the country's lack of a coherent roadmap for integrating digital assets into its financial system, even as the transition to digital finance approaches a pivotal moment.
BOK backs off
The BOK recently notified local banks that the second phase of its central bank digital currency testing program, titled 'Project Han River,' has been put on hold.
In April, the central bank launched the first phase of a pilot program to test the feasibility of a digital currency. Over a three-month test period, participants used tokenized deposits to purchase goods and services.
The second leg of the pilot project was to take place in the fourth quarter, testing additional features such as person-to-person transfers and a simplified verification process. But the BOK has suspended the plan.
"We plan to resume testing after thoroughly reviewing institutional changes, such as the clarification of stablecoin-related legislation. Once the uncertainties are somewhat resolved, we will discuss effective testing measures with participating institutions," a BOK official said.
The suspension stems from the participating banks' uneasiness about the project, burdened by the costs of setting up the infrastructure for testing. The banks reportedly spent a combined 30 billion won ($22 million), a significant amount considering the absence of a clear timeline for full-scale implementation.
Are stablecoins, CBDCs at odds?
While banks remain doubtful about the implementation of a CBDC, they are eager to take the lead in the won-backed stablecoin market.
In recent weeks, banks have been competitively filing trademark applications, combining KRW, the currency code for the Korean won, with abbreviations of their names. They are also launching task forces and seeking to launch joint ventures with tech partners.
"Stablecoins are not a far-fetched idea. They have already become a part of the economy," an official from a local lender said. "Stablecoins allow for more concrete business discussions, while the institutionalization of CBDCs remains uncertain."
Both stablecoins and CBDCs function as forms of payment, with stable values pegged to a fiat currency. However, they are also fundamentally different: CBDCs are state-issued payment instruments, while stablecoins are operated by the private sector.
'CBDCs are advantageous in terms of financial stability and settlement finality, while stablecoins excel in technological innovation and global scalability,' Lee Jung-su, associate professor of international financial transactions, said at a policy meeting held in May.
'The closed nature of CBDCs poses limitations in terms of international interoperability and geopolitical risks. In contrast, stablecoins offer greater flexibility with cost efficiency and cross-chain compatibility.'
Though the two digital currencies are not mutually exclusive, the growing momentum for stablecoins could delay the rollout of a CBDC. If a stablecoin establishes itself as a major component of the digital asset market, the CBDC could lose ground.
On the verge
With a CBDC set aside for the moment, the question now lies in who will be allowed to issue won-backed stablecoins.
The ruling Democratic Party of Korea has proposed allowing nonbanking entities to issue them. The BOK remains cautious on the move, however, as the unchecked issuance of won-based stablecoins by nonbanking entities could undermine the effectiveness of the bank's policy tools.
Experts highlight that Korea is at a crucial turning point in shaping its digital finance landscape.
'When it comes to changes in the financial sector, it is always a question of finding a balance between stability and innovation. For the time being, Korea is on the brink of transformation,' said Lee Hyo-seob, a senior research fellow at Korea Capital Market Institute.
'Now is the time to prioritize innovation and from that perspective, nonbanking institutions can play a bigger role.'
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