Bank of Korea eyes wholesale CBDC, tokenized deposits with LG CNS

The Bank of Korea (BOK) has signed a deal with LG CNS to develop a wholesale central bank digital currency (CBDC) system and experiment with tokenized deposits.

LG CNS will deploy its technical expertise in blockchain to build a system for tokenized deposits for South Koreans, according to reports. LG CNS’s contract with the BOK is expected to be valid until March 2025 and will be executed in phases.

With an operational budget of KRW 9.68 billion ($7.45 million), LG CNS’ system is expected to play a central role in BOK’s wholesale CBDC trials in conjunction with other financial regulators. A tokenized deposit trial has already been scheduled for the last quarter of 2024, seeking to onboard 100,000 residents as participants.

Tokenized deposits are digital representations of traditional bank deposits on distributed ledgers offering a range of benefits. For starters, tokenized deposits offer the possibilities of fractional ownership, programmability, financial inclusion, and increased liquidity.

While technical details are sparse, LG CNS’s incoming system will allow the BOK to explore future use cases for tokenized deposits. Top on the list include utilities in cross-border payment, DeFi integration, and the possibilities for financial institutions to leverage them to roll out wealth management products for clients.

In conjunction with the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), the BOK has been testing the waters for a potential CBDC rollout. Rather than a frantic launch, the regulators opt for a cautious approach, interfacing with global financial agencies and local stakeholders for an appropriate strategy.

“Following consultations with relevant organizations and a review of related laws, the pilot project will be conducted first in the fourth quarter of 2024,” said the BOK back in November. “The possibility of conducting separate pilots will be considered as well if banks propose new individual projects.”

The BOK has since partnered with Banca d’Italia to collaborate on technical standards for CBDCs, but both regulators appear to be taking different routes. There are fears that the BOK may ditch the plans for a retail CBDC, given last year’s lackluster results and its advanced local payments ecosystem.

Tightening the screws

Ahead of the new round of CBDC studies, the BOK is reportedly beefing its staff strength while onboarding several South Korean commercial banks as partners.

Jeju, Incheon, and Busan will be the first set of cities to play host to the BOK’s pilot, with Jeju widely tipped to lead CBDC distribution at a public level.

The studies are expected to be geographically restricted, with the possibility of support for tourists to participate in the studies.

“The CBDC electronic wallet (app) will allow not only local residents but also many unspecified civilians such as tourists to open,” one banking executive shared in August.