- South Korea is launching a three-month trial combining tokenized bank deposits and a wholesale CBDC with 100,000 consumers starting in April 2023.
- Seven major Korean banks are participating, with consumers able to hold up to 1 million won ($693) using banking apps to make QR code payments at participating merchants.
- The trial will explore multiple interbank settlement models, including the Purpose Bound Money model co-developed with Singapore.
South Korea‘s central bank is moving forward with its blockchain payment initiative, as a three-month trial involving tokenized deposits and wholesale central bank digital currency (wCBDC) is set to begin in early April with 100,000 consumers. The Bank of Korea announced the trial plan in 2023, and has now confirmed the seven participating banks according to a recent Business Korea report.
Consumers participating in the trial won’t interact with the CBDC directly. Instead, they’ll use blockchain-based tokenized deposits issued by their banks. Payments will be processed through banking applications by scanning QR codes at checkout points. Consumer participation will be limited to holding a maximum of 1 million won ($693) at any time, with total transaction value capped at 5 million won during the trial period.
The trial includes several prominent merchants, both online and offline. Online participants include Hyundai Home Shopping and Ddangyo, while physical retail locations include 7-Eleven, Hanaro Mart, Kyobo Bookstore, Ediya Coffee, and Silla University.
Kookmin, Shinhan, Woori, Hana, Industrial Bank of Korea, Nonghyup, and Busan are the seven banks authorized to participate in this groundbreaking trial. The central bank previously outlined a two-phase approach, with banks performing similar functions in the first stage before exploring programmability options in the second round.
The technical infrastructure is being supported by the Korea Financial Telecommunications and Clearings Institute, which is reviewing and Hosting the smart contracts that will power the system. The Bank of Korea has also formalized partnerships with the Ministry of Science and ICT (MSIT) and the Financial Services Commission (FSC) to facilitate usability testing.
## The role of the wholesale CBDC
A key component of this trial is testing wholesale CBDC functionality for interbank blockchain settlements. The Bank of Korea will implement the Purpose Bound Money model it co-developed with Singapore, which creates a voucher-like system adding conditions to payment tokens, limiting their use to specific locations or purposes.
Following Singapore’s approach, Korea plans to experiment with multiple interbank settlement models. One potential approach involves minting and burning tokens. For example, if a Kookmin Bank customer pays a retailer banking with Nonghyup, the Kookmin tokens would be burned while new tokens are minted at Nonghyup for the merchant. This creates an interbank obligation that would be settled using wCBDC transfers between the banks.
The central bank will also test an e-money model where a bank like Kookmin would wrap wCBDC to create its own token. When a consumer makes a payment to a merchant using Nonghyup, the receiving bank would unwrap the token to access the underlying wCBDC. While more streamlined from a payments perspective, this approach doesn’t support fractional reserve banking.
A third potential model may involve using e-money style tokenized deposits on third-party platforms, such as distributed ledger technology (DLT) based securities trading systems.
The mint-and-burn approach does present certain inefficiencies compared to stablecoins, as the process must occur for every transaction. Alternative models beyond e-money exist that could address these limitations.
Ledger Insights Research has published a report on bank-issued stablecoins and tokenized deposits featuring more than 70 projects. Find out more here.
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