Bank of Korea Pauses CBDC Trials as Banks Pivot to Stablecoins

The Bank of Korea has reportedly paused its trials for a central bank digital currency (CBDC) as local banks shift their focus towards stablecoins. This move comes amidst a growing interest in stablecoins, which are digital currencies pegged to the value of a stable asset, such as the Korean won. The government's promise to allow stablecoin issuance has captured the attention of major financial institutions, leading them to explore this new avenue rather than continuing with CBDC experiments.

On Sunday, the Bank of Korea informed banks participating in the CBDC tests that the second round of trials, scheduled for later this year, would be temporarily suspended and postponed. A senior official from one of the seven banks involved in the tests mentioned that the central bank is awaiting the government's plans for stablecoins and how a CBDC would integrate with such tokens. This decision reflects a broader trend in the financial sector, where stablecoins are seen as a more immediate and practical solution to the challenges posed by digital currencies.

Stablecoins offer the benefits of cryptocurrencies, such as fast and low-cost transactions, while mitigating the volatility typically associated with digital assets. This stability makes them an attractive option for both consumers and businesses looking to integrate digital currencies into their financial operations. The shift towards stablecoins is not without its risks, however. Regulatory frameworks for stablecoins are still evolving, and there are concerns about the potential for market manipulation and the stability of the assets backing these digital currencies. Despite these challenges, the growing interest in stablecoins suggests that they may play a significant role in the future of digital finance.

One senior banking official stated that the second part of the CBDC trials was already “on the verge of collapse” as the seven participating banks became unhappy with the cost of taking part. The participating banks reportedly told the Bank of Korea that the trial was too expensive and were unhappy that the central bank hadn’t specified a commercialization plan for the CBDC. The Bank of Korea floated moving the second half of the tests from later this year to the first half of next year and could limit the number of financial institutions taking part.

The first stage of the CBDC tests involved 100,000 participants testing payments using the central-bank-issued currency, which ran from April 1 to June 30. The second stage would have expanded the number of merchants and brought in remittances. The banks reportedly wanted to focus on issuing their own stablecoins, seemingly as there is a clearer path to financially benefiting from such tokens. On Wednesday, it was reported that eight South Korean banks would team up to launch a won-backed stablecoin by next year. Half of the banks that came together for the stablecoin — KB Kookmin, Shinhan, Woori and NongHyup — also took part in the first stage CBDC trials.

The Bank of Korea's decision to pause CBDC trials is a strategic move that allows the institution to reassess its priorities in light of the changing landscape of digital currencies. By focusing on stablecoins, the bank can better align its efforts with the current trends in the financial sector and position itself to take advantage of the opportunities presented by this emerging technology. This shift also highlights the importance of regulatory clarity and innovation in the development of digital currencies, as stablecoins offer a more immediate and practical solution to the challenges posed by CBDC trials.