A busy couple of days for the Central Bank of South Korea saw it announce a large-scale payment test for its central bank digital currency (CBDC), a day after it rejected the idea of a BTC reserve, citing high volatility and liquidity concerns.
The Bank of Korea (BoK), the central bank of South Korea, will launch a real-world transaction experiment for its retail central bank digital currency (CBDC) starting next month. Around 100,000 participants will be able to convert their bank deposits into a digital currency called “deposit tokens” and use them for payment at affiliated merchants.
According to local reports, the BoK will collaborate with seven banks—namely KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, IBK Industrial Bank of Korea, and BNK Busan—to conduct the “Digital Test Project Hangang” from early April to the end of June. The BoK hopes that this three-month period will be enough time to assess the practical application of a CBDC in everyday transactions.
Currently, high street banks conduct transactions and settlements using reserves deposited in accounts with the central bank. Through this test, the BoK and the banking sector will explore whether this process can be replaced with a CBDC based on distributed ledger technology (DLT).
Once the BoK issues its CBDC, banks can issue corresponding payment tokens. Individual participants can then convert cash from their bank accounts into deposit tokens and use them at designated online and offline merchants, which include Hyundai Home Shopping, Ddangyo, 7-Eleven, Hanaro Mart, Kyobo Bookstore, Ediya Coffee, and Silla University.
Payments will be processed via QR codes within the respective banking apps, with a holding limit for deposit tokens per person set at KRW 1 million ($689.23) and a total transaction limit of KRW 5 million during the test period.
“Through deposit token payments, merchants can receive settlement funds in real time,” said a BoK official. “Additionally, related transaction fees are expected to be reduced by minimizing intermediary institutions in the payment process.”
The BoK launched its CBDC pilot program in April 2020 to develop a CBDC that would advance the payments system and increase financial inclusion. The first phase of the pilot was successfully finished in December 2021, and the second phase was completed in June 2022. In April 2024, the BoK joined ‘Project Agorá,’ led by the Bank for International Settlements (BIS)—an international financial institution owned by member central banks that aims to foster global monetary and financial cooperation—in collaboration with six other central banks. The project seeks to tokenize cross-border payments by developing a unified, programmable infrastructure.
Regarding the BoK’s latest CBDC test phase, it plans to issue a public announcement by the end of this month to recruit around 100,000 participants for the experiment.
South Korea not jumping on the BTC reserve bandwagon
The BoK’s CBDC announcement came a day after the bank ruled out adding BTC to its national reserves, citing extreme price volatility and failure to meet liquidity and investment-grade standards, according to a local report.
The decision followed United States President Donald Trump’s March 6 executive order to establish a BTC reserve in the country..
On March 16, in response to a written question from Cha Gyu-geun, a member of the Parliamentary Planning and Finance Committee, the BoK stated that “we believe a cautious approach is necessary regarding the inclusion of Bitcoin in foreign exchange reserves.”
The reason given by the bank was the unpredictability of Bitcoin.
“If the virtual asset market becomes unstable, there is a significant risk of transaction costs escalating rapidly when converting [BTC] into cash,” said the BoK.
Further, the bank stated that “we believe that it [BTC] does not meet the International Monetary Fund’s (IMF) criteria for calculating foreign exchange reserves.”
Since foreign exchange reserves must be readily available when needed, the IMF standard is that they must be immediately accessible, highly liquid, marketable, denominated in convertible currencies, and generally possess an investment-grade credit rating.
Bitcoin, the BoK suggested, does not meet these criteria. For this reason, the bank said, “So far, we have not discussed or considered the inclusion of Bitcoin in foreign exchange reserves.”
South Korea currently holds around $415 billion in foreign exchange reserves, making it the 9th-largest economy in the world.
Despite Trump’s enthusiasm for BTC as a reserve asset, South Korea isn’t the first country to rule it out.
Earlier this year, Christine Lagarde, President of the European Central Bank (ECB), rejected the idea of incorporating BTC into European reserves on the basis that it is too volatile and associated with money laundering.
“I am confident that… Bitcoins won’t enter the reserves of any of the central banks of the General Council,” Lagarde told a press conference on January 30, adding that “Reserves have to be liquid, secure, and safe.”
Watch: Finding ways to use CBDC outside of digital currencies
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