The breakthrough of cryptocurrencies, so far used mostly for investing and speculation,
has also put the spotlight on the idea of digital currencies issued by central banks.
C-B-D-Cs for short. No country has yet changed its currency to
a digital token, but many are now experimenting with the idea, including the Bank of Korea.
The BOK will start testing the feasibility of a digital won... in a virtual environment
later this year. Today, I'm joined in the studio by our very
own Kim Jae-hee, who's been doing a deep dive into the CBDCs... the concept, and the progress
made so far. Jae-hee, great to have you here today.
Good afternoon, Devin.
So, before we look at what's being done at the Bank of Korea, tell us... what is a central
bank digital currency, how it differs from cryptocurrencies like bitcoin.
A CBDC is a national currency represented by a digital token,... whereas cryptocurrencies,
are a form of virtual asset,... and are currently not recognized as a currency by the government.
Also, cryptocurrencies are decentralized... while CBDCs would be centralized.
State-issued digital tokens would also be backed by the "full faith and credit" of a
state, so they should be more stable and secure than crypto.
But same as cryptocurrencies, CBDCs to a varying degree would be based on blockchain technology,
which guarantees security. The transition to a digital currency would
come with various benefits,... such as reduced costs for transactions and maintenance.
The BOK has acknowledged the need for a transition to a digital token.
"There's great need for central banks to issue CBDCs as a safe means of payment... that is
free of credit risks and liquidity risks."
But there are also potential downside risks. Transactions made with CBDCs are trackable,...
giving the government great powers of surveillance. This could pose risk to people's privacy.
Okay, so you said the BOK is about to launch a pilot program for a digital token. What
do they want to achieve with that, and how will they do it?
The Bank of Korea will kick off a 10-month simulation study of CBDCs in August,... to
test ways of issuing, redeeming and making payments with a digital won.
This pilot platform requires partnerships with private companies.
The central bank will issue the currency,... and private financial services institutions,
and fintech... and IT companies... will be in charge of the currency's circulation.
All this will be done in a virtual environment. The BOK points out that the pilot program
might not lead to the issuance of a CBDC right away,... but is the first step in building
the foundation for it.
"This is the first step in constructing an experimental environment for technological
research into CBDCs. In phase one this year, we'll conduct tests related to payments and
deposits. Next year, in phase two, we'll test remittances between countries, offline payments,
and digital asset purchases,... such as the purchase of digital artwork and copyrights."
The BOK will also choose a private firm as a technology supplier, through open bidding.
Some companies have already shown interest,... such as Naver, Kakao, and the IT arm of LG
Corporation, LG CNS.
"No one has experience yet in issuing CBDCs,... so businesses are eager to be first ones to
get it, even at their own expense. So this opportunity to do so with the government's
budget, is of great interest to them."
The budget for the trial is almost 5 billion won, or about 4-and-a-half million dollars.
And I understand that it's not just the Bank of Korea, but other central banks too are
looking at this. The Fed, for one has expressed interest. What are other countries doing in
terms of developing their own digital tokens?
Most major central banks are exploring and experimenting with CBDCs. China has the ambitious
goal... of reshaping the dollar-centered global economy with a digital yuan.
It's been testing out its digital yuan in regions like Shenzhen, Suzhou, Beijing and
even Hong Kong. In the U.S., the Boston Federal Reserve and
MIT are collaborating on a research project to construct and test a digital dollar.
Their initial research will be released in the third quarter this year.
UK, in April, forged a task force to look into a potential digital pound, the "Britcoin."
Japan has also kicked off phase one of its 'Proof-of-Concept' testing for a digital yen,...
and Russia is planning to launch a prototype for a digital ruble this year.
Meanwhile, the Bahamas,... officially issued its digital "Sand Dollar" in October 2020.
"There's a war going on to develop digital currencies,... with economies hoping to make
their CBDC a world reserve currency. I believe South Korea is a little behind,... not in
terms of IT, but in government policy and strategy. The Bank of Korea should fast-forward
its research on the digital won."
And lastly,... Jaehee, if we are no longer using ATMs or processing transactions with
our credit and debit cards, how will this affect the banks, and how are they responding
to this?
Many economists do worry that the shift to digital money would threaten the traditional
banking system. People would be able to transfer their deposits
from their bank accounts to a CBDC account, which it's thought would be more reliable
and safe. In this case, banks may no longer be able
to make money by taking deposits and making loans.
But the BOK stress that it'll work to ensure that banks can coexist.
"A recent report published by the Bank for International Settlements says that the first
consideration in issuing a CBDC should be whether it can be harmonized with the current
financial system. Our pilot program also aims harmony with the current financial system."
It's been suggested that one way to do that might do that might be a cap on CBDC holdings.
So, it's hard to say at this point what the banking industry will look like if currencies
start truly going digital. But the Bank of Korea and others are researching
and testing these concepts to make sure it's a smooth transition.
All right. Thank you for the updates, Jae-hee.
My pleasure.