Last fall, the Bank of Korea announced it would test the central bank’s digital currency distribution in 2021. Preparations appear to be on several fronts. The bank today published a new book devoted to the legal issues of the bank’s possible issuance of such a currency.
According to a summary in Korean media, the book calls for a revision of the law to ensure that a future CBDC can function successfully. The Bank of Korea has made particular use of blockchain technology to manage the transactions as part of its 22-month CBDC pilot program, which began in April 2020 and will be completed in December this year. Testing the distribution of the currency in 2021 represents the third phase of this project, after focusing on technological development and initial operational analysis in phases one and two.
The newly published book confirms this timeline and scope and outlines: “The Bank of Korea is conducting an operational process analysis for a CBDC rollout, and external consultations are also being conducted. This year we will launch a CBDC pilot system in a virtual environment and run tests to verify its functionality and safety. “In addition, the bank gives the rationale for the project and the potential benefits of a future digital currency:
“Switching from cash to digital currency could increase GDP by up to 3 percent. The digitization of the currency would accelerate the currency circulation and reduce maintenance costs. It would also be an efficient way to realize negative interest rates and improve the government’s overall currency management. “
The likely usefulness of a CBDC in maintaining negative interest rate policies was recognized by other central bank officials, including the Deputy Governor of Japan, last year. While these guidelines have indeed been adopted in Japan since 2016 and Europe since 2014, other central bankers have left the door open for a similar move amid the uncertain recovery of their COVID-19 economies, most recently the Bank of England.
Alongside this, an unnamed analyst quoted by Korean media has pointed to China’s accelerated rollout of a digital yuan and indicated that its likely impact on the international monetary system is a factor in Korea’s own research and development efforts this year:
“The US dollar may be the standard currency for cash, but China is aiming to make the digital yuan the new dominant medium. South Korea needs to develop strategies as to what position the country will take in the new currency era. “
The expert also stressed the need to study the potentially negative consequences of CBDCs, such as the aggravation of existing economic inequalities due to “gaps in digital information”.