South Korea prepares second phase of CBDC pilot focused on subsidy payments

The Bank of Korea (BoK) is reportedly preparing to launch the second phase of its central bank digital currency (CBDC) pilot, with a key emphasis on testing the distribution of government subsidies through digital currency. The CBDC project ultimately aims to enhance fiscal efficiency by curbing misuse and slashing administrative costs. However, the broader pushback against the CBDC from citizens remains, with many of them seemingly believing that it is a tool for government surveillance. Is South Korea’s CDBC ready? According to reports , the Bank of Korea (BOK) is accelerating the resumption of the CBDC experiment amid delays in discussions on the Korean won stablecoin bill . According to sources cited in local reports on December 21, the BOK already sent out an official document to major banks regarding the second round of CBDC testing. A BOK official stated, “Details, including the specific method and schedule, are currently under discussion.” Under the second phase of testing, the BoK is allegedly considering distributing a portion of government subsidies in the form of digital currency. They hope the CBDC can help limit its use and reduce the management and administrative costs linked with subsidy execution. The first phase of the CBDC experiment was conducted with seven banks and lasted three months before it was suspended. At the time, the experiment received backlash for its limited practical utility and the financial burden it placed on the participating banks, which amounted to billions of won. Revival of the testing phase was floated in late August of this year during a meeting between BoK Governor Rhee Chang-yong and Finance Minister Koo Yun-cheol, in which they discussed using CBDC for subsidy payouts as a way to address the problems. The banking industry is adamant that a second round of testing is required for the time being. One banking industry official said, “With the official document, we have no choice but to restart preparations.” At the same time, it has become clear that South Korea may be looking to pursue both the stablecoin and CBDC avenues, rather than sticking with one. A BOK official stated, “Stablecoins and CBDCs have different roles and purposes, so they can coexist. We are proceeding with previously scheduled procedures and are not directly related to the delay in discussions on the won-denominated stablecoin bill.” Despite such statements pushing the efficiency narrative, the pushback from South Korean citizens against broader CBDC adoption has been massive, with online petitions making concerning claims like how it could facilitate excessive government surveillance and control over personal finances, gaining traction. South Korean agencies debate stablecoin oversight The launch of the second phase of CBDC testing is being debated as the institutionalization of the Korean won-denominated stablecoin continues to be delayed due to the inability of the Financial Services Commission and the Bank of Korea to see eye to eye over the matter of issuer and regulatory framework. The Democratic Party of Korea’s Digital Asset Task Force (TF) initially requested that the Financial Services Commission submit a government proposal by December 11, but the Financial Services Commission reportedly submitted only a rough outline of the draft bill. The draft, “Key Contents of the Framework Act on Digital Assets,” claims the Financial Services Commission (FSC) proposed a plan to designate important stablecoins based on the number of stablecoin users and issuance volume. This designation should have been made in consultation with the Bank of Korea (BOK). As such, it is interpreted as only partially reflecting the BOK’s concerns about the issuance of won-denominated stablecoins. The final draft is expected but has been delayed due to the failure to coordinate opinions on key issues, such as the requirements for issuing by bank-centered consortiums and the unanimous agreement of the policy consensus body. If you're reading this, you’re already ahead. Stay there with our newsletter .