South Korea Pauses CBDC Pilot Amid Shift to Stablecoins

The Bank of Korea has decided to put its central bank digital currency (CBDC) pilot on hold. This decision comes after months of preparation with local banks to test the digital version of the won. The first phase of the pilot, which involved 100,000 users making test payments at participating merchants, including 7-Eleven, ran from April to June. The second round, which was set to begin later this year and expand to remittances and more merchants, has now been postponed.

Officials from several participating banks have expressed concerns about the project, citing high costs and a lack of a clear path to real-world use. One source described the pilot as “on the verge of collapse,” highlighting frustration over budget concerns and the absence of a commercialization plan from the central bank.

The delay in the CBDC project coincides with a broader shift in South Korea’s digital asset policy under the newly elected President Lee Jae-myung. President Lee campaigned on legalizing and promoting won-based stablecoins. His ruling Democratic Party submitted a bill this month that would allow companies with at least 500 million KRW in equity to issue their own stablecoins. This proposal has added new momentum to private-sector efforts, with eight banks now planning to launch a won-pegged stablecoin by 2026.

The Bank of Korea is now waiting to see how this legislation plays out before moving forward with further CBDC tests. A central bank official stated that they are reassessing how a CBDC would fit alongside private tokens. Banks seem to prefer the stablecoin route, which could offer clearer monetization opportunities. Half of the banks involved in the CBDC pilot, including KB Kookmin, Shinhan, and NongHyup, are also involved in the new stablecoin push.

Retail investors are also showing significant interest in the growth of cryptocurrencies. A recent survey found that 27% of South Koreans aged 20 to 59 already hold digital assets, and 70% of them plan to increase their exposure over the next year. While younger investors cited high returns as their main motivation, older users leaned toward using crypto as part of retirement planning.

Interest in stablecoins is not limited to South Korea. Following its IPO, U.S.-based Circle — the company behind USDC — became the most purchased overseas stock by Korean investors. Locally, KakaoPay’s stock has surged on optimism over friendly crypto policy.

This shift towards stablecoins reflects a broader trend in the global financial landscape, where stablecoins are increasingly seen as a viable alternative to traditional digital currencies. Stablecoins offer a more stable value compared to volatile cryptocurrencies, making them an attractive option for both financial institutions and consumers. The renewed focus on stablecoins is expected to foster innovation and competition within the fintech sector, as domestic banks and corporations race to develop and implement stablecoin solutions.

The decision to prioritize stablecoins over CBDCs highlights the challenges and complexities associated with developing and implementing a central bank digital currency. CBDCs require extensive infrastructure, regulatory frameworks, and public trust, which can be difficult to achieve in a short period. In contrast, stablecoins offer a more flexible and adaptable solution, as they can be issued and managed by private entities, reducing the burden on central banks. This flexibility allows for faster innovation and deployment, making stablecoins an attractive option for both financial institutions and consumers.

The shift towards stablecoins is also expected to have implications for South Korea's regulatory environment. As stablecoins gain momentum, regulators will need to develop appropriate frameworks to ensure their safe and responsible use. This includes addressing issues such as consumer protection, anti-money laundering, and financial stability. The government's support for stablecoins is likely to drive regulatory developments, as policymakers work to create a conducive environment for the growth and adoption of these digital assets.

In conclusion, South Korea's decision to pause its CBDC initiative and focus on promoting domestic stablecoins marks a significant shift in its digital currency strategy. This move is driven by the potential benefits of stablecoins, which offer a more stable value and flexible solution compared to CBDCs. The renewed focus on stablecoins is expected to foster innovation and competition within the fintech sector, as well as drive regulatory developments to ensure their safe and responsible use. As stablecoins gain momentum, they are poised to play a crucial role in shaping the future of South Korea's financial ecosystem.