Central Bank of Korea Includes Research on CBDCs in Annual Report

South Korea’s central bank has included a summary of research on central bank digital currencies (CBDC) in its 2018 annual payment settlement report issued Tuesday, March 26.

The development of distributed ledger technologies (DLT) and crypto assets has fueled a debate over CBDCs, especially after Uruguay and Tunisia issued their own, the report reads.

The Korean central bank had also conducted its own research on CBDCs while it was considering launching one earlier in 2018 — an idea that was later put aside. The report included tests of blockchain-based solutions: generally speaking, the Korean experts believe that crypto assets can be widely used if their stability and efficiency are further improved.

The report focuses on the fact that CBDCs can be used not only for transactions between different financial institutions, but for micropayments as well, which might significantly impact both society and the economy.

The ability to trace transactions via distributed ledger and thus limit anonymity is one of the key advantages of a CBDC, according to the document. Moreover, the experts believe that blockchain-based CBDCs are more secure for settlement payments, because transactions cannot be cancelled after they are made. However, using a digital currency will not significantly reduce the time required for the transfer of funds, the report notes.

As to the impact on monetary policy and financial stability, the central bank of South Korea claims that CBDCs could possibly weaken the intermediary role of commercial banks. As some institutions will hold their deposits in CBDCs, the number of traditional deposits in other banks will inevitably decrease.

On the other hand, central banks will allocate more credits and thus gain a leading role in the case of their issuing CBDCs. The experts recommend carefully examining CBDCs prior to issuing them, as it might affect global financial markets in general.

As a conclusion, the Korean experts reiterate the central bank’s stance not to issue its own CBDC. However, the bank is planning to continue CBDC-related research, along with their stated goal of reducing the use of cash and closely monitoring digital currency trends. Moreover, the central bank has announced a securities settlement test based on blockchain technology that will be performed later this year.

The country’s central bank has previously issued a warning on CBDCs, stating that their issuance would result in mass withdrawals of funds from private institutions, squeezing liquidity and pushing up interest rates.

As Cointelegraph previously reported, a January report by the Swiss-based Bank for International Settlements found that 70 percent of central banks worldwide are conducting research into CBDC issuance. However, concrete plans for implementation and motivations vary depending on the context.