South Korea Banks Shift Focus to Stablecoins, Suspend CBDC Trials

The Bank of Korea has announced a temporary suspension of its central bank digital currency (CBDC) trials, which began in April. This decision comes as participating banks shift their focus towards stablecoins, driven by the government's recent promise to allow the issuance of these digital assets. The shift in priorities reflects a growing interest among financial institutions in stablecoins, which are seen as a more immediate and potentially lucrative opportunity compared to the longer-term development of a CBDC.

The suspension of the CBDC trials is a significant development in South Korea's digital currency landscape. The Bank of Korea had been actively exploring the potential of a digital won, conducting trials with several major banks to assess the feasibility and benefits of a CBDC. However, the allure of stablecoins, which are backed by traditional assets and offer stability in value, has proven to be a strong distraction for the participating banks.

Newly elected President Lee Jae-myung campaigned on a list of crypto promises, including allowing for the issuance of stablecoins, crypto tokens that track the price of currencies such as the Korean won. His party put forward a bill earlier this month that would allow companies to issue such tokens with a minimum equity capital of 500 million Korean won. 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 government's decision to permit the issuance of stablecoins has created a new dynamic in the financial sector. Banks are now exploring the possibility of issuing their own stablecoins, which could provide them with a competitive edge in the rapidly evolving digital currency market. This shift in focus is likely to accelerate the adoption of stablecoins in South Korea, as banks seek to capitalize on the growing demand for digital assets that offer stability and security.

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 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 suspension of the CBDC trials is not necessarily a setback for South Korea's digital currency ambitions. Instead, it represents a strategic pivot towards a more immediate and potentially profitable opportunity. The development of stablecoins could pave the way for a more robust digital currency ecosystem in the country, which could eventually integrate with a CBDC in the future. The Bank of Korea's decision to pause the CBDC trials reflects a pragmatic approach to digital currency development, prioritizing short-term gains while keeping long-term goals in sight.