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. Will there be digital currencies in Korea that are banked by a central bank? Well, the Bank of Korea is planning to debut its own CBDC (Central Bank Digital Currency) by the end of 2021.

Advantages of CBDC over Cryptocurrencies

digital currencies in KoreaBitcoin, 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, Koreans are used to making transactions through banking apps. However, what would make CBDCs different?

Unlike traditional currency, 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. Banks not just in Korea, but all around the world are worried that the widespread adoption of these independent cryptocurrencies could 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 have. 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 will test its CBDCs on fund transfers, payments, issuance, redemption, and distribution. The aim is to have a publicly available CBDC in Korea that would have all the desirable characteristics of cryptocurrencies. CBDCs will be recognized by law and backed by the power of the central bank, which can’t go bankrupt. Therefore, these CBDCs can be trusted as much as the Korean won and as easy to pay as a payment app like Toss. Moreover, it can be easily adopted because it can be distributed through commercial banks to avoid too much disruption to Korea’s financial ecosystem.

CBDCs in Korea means that someday everyone in Korea could have access to digital currency. Once the digital currency is fully adopted in Korea there are many possibilities and benefits. For example, payments will be made much faster and can be settled immediately due to no processing delays. Most of all, all these transactions will be cheaper for the users.

Issuing digital currencies in Korea could also make it easier for the Korean government to deliver payments to its citizens. Social welfare payments can also be done via CBDCs.

The Future of CBDCs in Korea

The Bank of Korea has already started pilot tests. Thousands of Korean consumers have already been involved with the pilot. 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. However, there will be issues that will need to be tested out before its official launch in Korea.

Privacy of users and all their information and the appropriate technology that will carry the CBDC will need to be fully figured out before it is launched. Initially, CBDCs in Korea will not be focused on replacing the Korean won but rather to 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.