South Korea CBDC Tests Paused: Banks Eye Lucrative Stablecoin Boom

Big news from South Korea! The country’s central bank has reportedly hit the pause button on its digital currency experiments. Why the sudden stop? It seems the nation’s major banks are getting serious about stablecoins, potentially seeing a clearer path to profit compared to a central bank digital currency (South Korea CBDC).

Bank of Korea Puts the Brakes on CBDC Test

The Bank of Korea (BoK) has apparently informed banks involved in its central bank digital currency trials that the project is temporarily suspended. The second phase of tests, initially planned for later this year, is now postponed. This decision comes as the South Korean government shows increasing support for local currency stablecoins, creating a potential conflict or overlap in the digital currency landscape.

A senior official from one of the participating banks indicated that the BoK is waiting to understand the government’s stablecoin plans and how a CBDC would fit alongside these commercial tokens. Newly elected President Lee Jae-myung had campaigned on allowing stablecoin issuance, and his party recently proposed a bill permitting companies to issue such tokens with a minimum capital requirement.

Why Are Korean Banks Shifting Focus to Stablecoin South Korea?

The pause isn’t just about government policy; it also stems from concerns raised by the banks themselves. The second part of the CBDC trials was reportedly ‘on the verge of collapse’ due to the significant costs incurred by the seven participating institutions. Banks found the trial expensive and were dissatisfied that the Bank of Korea hadn’t outlined a clear plan for commercializing the CBDC.

This expensive and uncertain CBDC project contrasts sharply with the perceived potential of stablecoins. Korean banks reportedly see a more direct route to generating revenue from issuing their own stablecoins. This focus intensified recently with reports that eight South Korean banks are collaborating to launch a won-backed stablecoin by next year. Notably, half of these banks were also involved in the first phase of the CBDC trials, highlighting the shift in priorities among key financial players.

Comparing CBDC Trials and Bank Stablecoin Initiatives

Let’s look at the different approaches being considered:

• Bank of Korea CBDC Test: Focused on exploring the technical feasibility and potential use cases of a central bank-issued digital won. The first phase involved testing payments with 100,000 participants. Banks found it costly with no clear commercial return plan.
• Korean Banks’ Stablecoin Plan: Involves multiple commercial banks collaborating to issue a won-backed stablecoin. The goal appears to be creating a digital asset they can control and potentially profit from through transaction fees, services, or integration into existing financial products. This aligns more closely with their traditional business models.

This situation highlights a common tension globally: how central bank digital currencies might coexist or compete with privately issued stablecoins. For Korean banks, the path offered by stablecoins seems more immediately appealing from a business perspective.

Market Reaction and the Future of Digital Won

News of the CBDC suspension and the banks’ stablecoin focus had a mixed impact on South Korean fintech stocks. Some companies involved in mobile payments saw their shares fall, while others, particularly parent companies of the banks involved in the stablecoin initiative, saw slight increases. This suggests investors are reacting to the potential shift in where digital currency activity might concentrate.

The Bank of Korea is now considering options for the postponed second phase of the CBDC test, potentially moving it to the first half of next year and possibly limiting the number of financial institutions involved. However, the strong push from Korean banks towards stablecoin development signals a significant preference within the financial sector.

In Summary

South Korea’s decision to pause its CBDC test underscores the growing interest and potential perceived benefits of stablecoins among commercial banks. Faced with the high costs and uncertain commercialization of the Bank of Korea’s digital currency project, banks are pivoting towards issuing their own won-backed stablecoins, aligning with the government’s supportive stance. This development marks a crucial moment in South Korea’s exploration of digital currencies, suggesting that privately issued stablecoins may take precedence over a central bank digital currency in the near term.