Bank of Korea to Pilot Wholesale CBDC for Interbank Transactions
The Bank of Korea has announced plans to conduct a pilot project to test the functionality and efficiency of a wholesale central bank digital currency (CBDC). This digital currency will be utilized by commercial banks and other financial institutions for interbank transactions and the issuance of CBDC-backed digital currencies.
In collaboration with the Bank for International Settlements (BIS), the proposed system will allow participating banks to issue various types of digital currencies, such as tokenized deposits and e-money, using the wholesale CBDC as collateral. Additionally, the CBDC will facilitate interbank settlements.
The pilot may also explore applications beyond the banking sector, enabling instant settlements of tokenized assets like carbon credits with simultaneous delivery and payment.
Evolution of the Korean Pilot and its Objectives
This wholesale CBDC pilot builds upon previous experiments conducted by the Bank of Korea with a retail CBDC between July and December 2022. Despite the success of the retail CBDC trial, the bank determined that there was currently no need to introduce it due to the efficiency of existing payment infrastructure.
The objectives of this pilot project are multifold. Firstly, it aims to redirect attention away from cryptocurrencies towards more regulated alternatives. Additionally, it seeks to enhance tokenization and payment efficiency through integration with digital currencies. Lastly, it aims to align with the BIS’s Unified Ledger approach to avoid fragmentation and isolation within the system.
In July, the New York Federal Reserve conducted a similar test involving a tokenized wholesale digital dollar. The results were positive, demonstrating its effectiveness for interbank settlements and cross-border payments.
Hot Take: Exploring Wholesale CBDCs for Enhanced Financial Efficiency
The Bank of Korea’s upcoming pilot project to test a wholesale CBDC highlights the growing interest in central bank digital currencies as a means to improve financial efficiency and explore new possibilities for interbank transactions. By collaborating with the BIS and leveraging the experience gained from previous retail CBDC experiments, the bank aims to assess the viability of this system in various use cases.
With its potential to facilitate instant settlements of tokenized assets and enhance payment efficiency, the wholesale CBDC pilot not only addresses the needs of commercial banks but also aligns with the broader objective of integrating digital currencies into existing financial systems. This pilot represents another step towards a more unified and efficient global financial infrastructure.
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