Last fall, the Bank of Korea announced it would be testing the distribution of a central bank digital currency in 2021. Preparations appear to be going ahead on multiple fronts, with the bank's publication of a new book today dedicated to the legal questions raised by the potential issuance of such a currency.
According to a summary in Korean media, the book calls for revisions to the law to ensure that a future CBDC could successfully operate. The Bank of Korea has notably been using blockchain technology to manage the transactions in its 22-month long CBDC pilot program, which commenced back in April 2020 and will wrap up in December of this year. Testing the currency's distribution in 2021 represents the third phase of this project, following a focus on technological development and initial operational analyses in phases one and two.
The newly-published book confirms this timeline and scope, outlining that “the Bank of Korea is conducting an analysis of operational procedures for a CBDC rollout, and outside consulting is also underway. This year, we're going to launch a CBDC pilot system in a virtual environment, and run tests to verify its functions and safety.” In addition, the bank states the motivations behind the project and potential benefits of a future digital currency:
”Transformation from cash to digital currency could raise GDP by as much as 3 percent. Digitalization of currency would accelerate currency circulation and reduce maintenance costs. It would also be an efficient way to realize negative interest rates, overall enhancing the government's monetary management.“
The prospective usefulness of a CBDC for sustaining negative interest rate policies has been acknowledged by other central bank representatives, including the deputy governor of Japan, in the past year. While these policies have indeed been adopted in Japan since 2016, and in Europe since 2014, other central bankers have left the door open to a similar move amid the uncertain recovery of their COVID-19 economies, most recently the Bank of England.
Alongside this aspect, an unnamed analyst cited by Korean media has pointed to China's accelerated rollout of a digital yuan and suggested that its prospective impact on the international monetary system is a factor in Korea's own research and development efforts this year:
“The U.S. dollar may be the standard currency for cash, but China is aiming to make digital yuan the new dominant medium. South Korea needs to develop strategies on what position the country will take in the new monetary era.”
The expert further highlighted the need to investigate any potentially negative consequences of CBDCs, such as their amplification of existing economic inequalities due to “gaps in digital information.”