In 2023 the Bank of Korea announced plans for a trial that would combine tokenized deposits and a wholesale central bank digital currency (wCBDC). More recently the central bank confirmed the seven banks that will take part. Now Business Korea reported that the trial involving 100,000 consumers will run for three months, starting in early April.
From the consumer’s perspective, they won’t interact with the CBDC directly. Instead, they will use a tokenized deposit, a blockchain-based version of money issued by their bank. Payments will involve using a banking app to scan QR codes at checkout.
The online merchants taking part include Hyundai Home Shopping and Ddangyo, while mainstream merchants include 7-Eleven, Hanaro Mart, Kyobo Bookstore, Ediya Coffee, and Silla University.
For the trial, consumers can hold up to 1 million won ($693) at any time with total transactions during the period limited to 5 million won.
The banks approved for participation are Kookmin, Shinhan, Woori, Hana, Industrial Bank of Korea, Nonghyup, and Busan.
Previously the central bank said there would be two rounds of trials. In the first stage, all the banks do more-or-less the same thing. In a subsequent round, each bank can have more freedom with programmability. The Korea Financial Telecommunications and Clearings Institute is reviewing and hosting the smart contracts involved. Additionally, the central bank signed an agreement with the Ministry of Science and ICT (MSIT) and the Financial Services Commission (FSC) for the usability tests.
The role of the wholesale CBDC
The purpose of the wholesale CBDC is to enable interbank settlement on the blockchain. The Bank of Korea previously stated it would use the Purpose Bound Money model, which it helped Singapore to develop. That involves a type of voucher system which adds conditions to the payment tokens, so the token may only be usable at certain places or for certain purposes.
However, like Singapore, Korea plans to trial different modes of interbank settlement.
We’re speculating here, but one potential model involves minting and burning. Say a client of Kookmin Bank uses a token to pay a retailer that has an account at Nonghyup Bank. One way that can work is the Kookmin Bank tokens are burned and new tokens are minted at Nonghyup Bank for the merchant’s benefit.
That meets the consumer and merchant needs, but Kookmin Bank now owes money to Nonghyup Bank which can be settled by Kookmin paying the wCBDC across to Nonghyup. We don’t know if this is the specific design, but it is one generic way that tokenized deposits can work.**
The central bank also plans to trial an e-money type model. In this case, Kookmin Bank would wrap some wCBDC to make a Kookmin token. When the consumer pays the merchant, Nonghyup bank unwraps the token and now has wCBDC as payment. This is more simple and elegant from a payment perspective, but does not support fractional reserve banking.
Additionally, the central bank may try a third type. That might involve using the e-money style tokenized deposit on a third party platform, such as a DLT based securities trading platform.
** This generic design has some drawbacks. For example, compared to stablecoins, a mint and burn for every transaction seems more than sub optimal. There are alternatives, other than e-money, that address the drawbacks of minting/burning or transferring tokens between banks. These are explored in the report below.
Ledger Insights Research has published a report on bank-issued stablecoins and tokenized deposits featuring more than 70 projects. Find out more here.
