Bank of Korea's Digital Won: A Flow Test for Payment Cost Reduction

The immediate infrastructure scale is now defined: Phase 2 expands the digital won pilot to nine commercial banks. This includes the original seven institutions-KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, NH Nonghyup Bank, IBK Industrial Bank of Korea, and BNK Busan Bank-plus the additions of Kyongnam Bank and iM Bank. The core flow target is clear: the pilot focuses on large-scale, won-pegged deposit tokens built on a wholesale central bank digital currency (CBDC) layer. The stated aim is to cut transaction costs for corporations and merchants burdened by credit card fees.

This wholesale layer is designed for high-value, business-to-business flows. The Bank of Korea's digital currency planning team emphasized that participating banks are securing use cases for large businesses and small merchants with high public relevance. The goal is to offer a lower-cost payment alternative, directly targeting the fee burden that plagues current systems. Peer-to-peer transfers, which were challenging in the initial phase, will now become possible within this expanded test.

Separately, the Bank of Korea is launching Project Hangang, a three-month retail pilot. This initiative will test state-backed digital tokens with 100,000 participants for everyday payments. Scheduled from April to June, it mirrors existing mobile payment methods but uses deposit tokens backed by the central bank. This retail test runs parallel to the wholesale focus, providing a dual-track assessment of the digital won's potential.

The Direct Cost Flow Equation

The pilot's immediate financial target is clear: to reduce the transaction fees burdening small merchants. Bank of Korea leadership has explicitly stated that Phase 2 will focus on use cases for "small merchants with high public relevance and significant payment fee burdens," aiming to offer a lower-cost alternative to credit card processing. This direct cost flow equation is the core test of the digital won's utility.

Yet the path to that cost reduction requires significant upfront investment. A senior central bank official has acknowledged that "the second phase will require significant investment," with the timeline and cost-sharing arrangements between the central bank and participating lenders still pending further discussions. This creates a near-term operational and financial hurdle for the nine commercial banks now in the test.

This CBDC testing occurs alongside real-world stablecoin adoption, which is already moving into payment flows. For example, Hana Card has launched a pilot offering 5% CRO cashback on USDC-funded Visa payments for tourists. This initiative, built with Circle, shows how private stablecoins are being integrated into regulated payment rails, providing a parallel, commercial path that may pressure the state-run digital won to demonstrate clear cost advantages.

Catalysts, Risks, and What to Watch

The primary near-term catalyst is policy clarity. The digital won pilot advances as South Korea's Digital Asset Basic Act (DABA) is delayed over disputes about who can issue KRW-pegged stablecoins. This regulatory uncertainty creates a parallel market where private stablecoins, like the 5% CRO cashback pilot from Hana Card, gain traction. The digital won must demonstrate a clear cost and trust advantage to justify its state-backed model.

A key operational risk is 'last mile' friction. Past digital payment pilots show that connectivity issues and user trust gaps can derail adoption, even with a functional system. The Bank of Korea's focus on small merchants with high public relevance makes this critical; if the system fails at the point of sale, the entire cost-reduction thesis collapses. The pilot's success hinges on seamless, reliable end-user experience.

The long-term watchpoint is the Bank of Korea's final decision on issuing a full CBDC. The central bank has not yet decided, and developing one is a complex process that typically takes several years. The current pilot, including the Phase 2 tests and the Project Hangang retail pilot, is a crucial research phase to inform that future choice.