The Bank of Joseon introduced currency notes in Korea back in 1946. 4 years later, a new central bank called the Bank of Korea replaced the Bank of Joseon. Now they play a major role in maintaining price stability in South Korea. However, recently with the rise of Bitcoin and other cryptocurrencies, there have been talks of the Bank of Korea launching its own digital currency. This means it will be sooner rather than later that there will be digital currencies in Korea that are banked by a central bank. The plan for the Bank of Korea is to debut its own CBDC (Central Bank Digital Currency) by the end of 2023.
Advantages of CBDC over Cryptocurrencies
Bitcoin, Ethereum, and other cryptocurrencies have very high volatility. This means that there are limits on how they can function in an economy. Can it work as a method of payment? The idea of digital currency in Korea is something that has been around for many years. Koreans are very familiar with payment apps such as Kakao Pay or Toss. In addition, banking apps are also very popular in Korea. However, what would make CBDCs different?
Unlike traditional currencies, cryptocurrencies are not issued by a central bank. Instead, they are created by a decentralized network of computers, usually using blockchain technology. The biggest companies in Korea such as Kakao (Ground X) and Samsung have gotten into the digital currency space. Soon most of the top banks in Korea followed. The fear from banks early on was that cryptocurrencies had the potential to weaken their control over the financial system. This could lead to financial instability, especially because cryptocurrencies do not have the legal or regulatory safeguards that money printed by central banks has. Therefore, it makes sense that most central banks around the world are looking into a digital currency of their own.
Digital Currencies in Korea
The Bank of Korea wrapped up the first phase of a CBDC simulation project in December of 2021. The next phase is to test CBDCs on fund transfers, payments, issuance, and redemption. The aim is to have a publicly available CBDC in Korea that would have all the desirable characteristics of cryptocurrencies. Due to the fact it will be backed by the power of the central bank, it will also be recognized by the law. This means it will not go bankrupt. In addition, it will be as easy to pay as a payment app like Toss.
Being distributed through commercial banks allows for easier adoption and will not cause disruption to Korea’s financial ecosystem.
CBDCs in Korea mean that someday everyone in Korea could have access to digital currency. Once fully adopted in Korea there are many possibilities and benefits when it comes to digital currencies.
CBDCs offers:
- no processing delays
- faster payments
- immediate settlements
- cheaper transactions
Issuing digital currencies in Korea could also make it easier for the Korean government to deliver payments to its citizens.
The Future of CBDCs in Korea
The Bank of Korea completed the second phase of its CBDC pilot program in 2022. The first phase of the pilot program had thousands of Korean consumers. What does this mean for the top fintech companies in Korea? The news can’t be good as once CBDCs are introduced in Korea, these Korean fintech companies will have their biggest competitor ever. There is no question about it, CBDCs will be a direct challenge to Korea’s existing payment technologies.
There are still many issues to figure out before the official launch of a CBDC in Korea. Some of the issues include the privacy of users’ information and the appropriate technology that will carry the CBDC. Initially, CBDCs in Korea will not replace the Korean won but rather complement it. As South Korea moves to a more cashless society, will CBDCs in Korea be as trusted as the Korean won? This is very possible and could take less than a few years to fully become a reality.
