March 27, 2024
Korean Wholesale CBDC Pilot: A New Frontier in Digital Finance
Latest Cryptocurrency News

Korean Wholesale CBDC Pilot: A New Frontier in Digital Finance

The Bank of Korea and the Bank for International Settlements (BIS) have jointly revealed plans for an upcoming pilot project focusing on the functionality of a wholesale central bank digital currency (CBDC) in various scenarios. A wholesale CBDC is designed for use by commercial banks and other financial institutions.

This proposed system, developed in collaboration with BIS, would enable participating commercial banks to issue various types of digital currencies, such as tokenized deposits and e-money, using the wholesale CBDC as collateral. Furthermore, this CBDC would facilitate interbank settlements.

The pilot might extend its applications beyond the banking sector, allowing for instant settlement of tokenized assets, such as carbon credits, with simultaneous delivery and payment.

The Korean pilot initiative builds upon earlier experiments by the Bank of Korea with a retail CBDC conducted between July and December 2022, which involved the participation of 14 financial institutions. While the retail CBDC trials were deemed successful, the bank has determined that introducing a retail CBDC is currently unnecessary due to the efficiency of its existing payment infrastructure. Moreover, introducing a retail CBDC could introduce new challenges in the financial system, potentially jeopardizing the role of banks in the Korean economy and raising privacy concerns among users.

The objectives of the wholesale CBDC pilot include redirecting attention from cryptocurrencies to more regulated alternatives, improving tokenization and payment efficiency through digital currencies, and integrating the system into a broader Unified Ledger approach defined by BIS to prevent system fragmentation and isolation.

Notably, a similar experiment was conducted by the New York Federal Reserve in July, focusing on the issuance of a tokenized wholesale digital dollar. The results indicated its potential suitability for interbank settlements and cross-border payments.

Image by Wikimedia Commons 

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