Central bank digital currency: what we have learned
from a recent hands-on experiment1
Keynote Address by Chang Yong Rhee
Governor of the Bank of Korea
IMF STI Peer-Learning Webinar
28 September 2022
Introduction
I would like to thank Director Schipke and the IMF-STI for hosting this webinar series and
inviting me to speak here today. It is also great to see Governor Talukder and my old
colleagues at the Fund Deputy Managing Director Sayeh, Ann-Marie, Raul and others. Today
I would like to speak about the recent CBDC experiment at the Bank of Korea.
Supported by accelerated digitalization and technological innovation, the landscape for
payment and settlement systems has been changing rapidly. And this has led interest in
central bank digital currencies (CBDCs) to grow considerably. Currently, 105 countries are
exploring CBDC issuance.2 What is noteworthy is that nine emerging market economies
including the Bahamas have already made an official launch of their CBDC, while central
banks in major economies are still at the stage of laying the groundwork for their own digital
currency.
CBDCs could promote financial inclusion by serving as a gateway to wider access to financial
services. This explains why CBDCs are issued first in emerging market economies. And we
have come together today to discuss fintech and financial inclusion particularly through the
strategy and efforts of Bangladesh. As for Korea, however, financial inclusion is not a key
factor for considering potentially issuing a CBDC, as bank account penetration is almost 100%
and various digital payment services are already well-developed. Rather, a top policy goal of
our CBDC research is to prepare for changes in the payments landscape driven by digital
transformation and the growing presence of big techs in financial services. In this regard, my
speech might not be directly related to today's topic but please understand that our experience
of developing CBDCs is highly relevant for the entire seminar series.
In particular, the Bank of Korea has recently completed its first experiment which lasted for
ten months on a retail CBDC based on distributed ledger technology (DLT). We are now
working on a follow-up experiment linking our test system to those of commercial banks and
also reviewing additional design options for a CBDC.
We have learned a lot during the hands-on experiment and I would like to share four lessons
from it with you today.
Lessons learned from the CBDC experiment
First, introducing a CBDC involves not just developing technology but also a process
of balancing trade-offs between various goals.
We have realized that there is no such thing as perfect technology or CBDC designs that can
satisfy all the various goals and expectations at the same time.
Let's take
design choices between a centralized versus decentralized ledger system, for
example. Our test system was designed based on DLT which is decentralized and has been
revolutionary innovation. Since we don't have any urgent need to introduce a
referred to as a
CBDC, we thought it would be better to test such a disruptive technology. In particular, DLT
has a significant potential in a token economy with a more decentralized internet (called
"Web3") and in the metaverse economy.
However, immediately the trade-off between innovation and stability kicks in. During the
experiment we found that DLT still has not overcome the limitations of scalability to support a
retail CBDC in the Korean economy. So, if the primary use case of a CBDC is for day-to-day
payments to online and offline merchants, without further technical advancements of DLT, we
may be better to use the standard centralized ledger database.
Another example is the trade-off between privacy and compliance.
At the earlier stage of our experiment, we considered allowing holders of small amount of
CBDC to own unhosted or non-custodial wallets, so that they can send and receive CBDC
with a high degree of anonymity and privacy.3 However, we found that it would become almost
impossible to carry out certain functionalities such as freezing wallets in the event of court
orders. So, in our design for the experiment we chose to improve compliance at the sacrifice
of privacy.
Inevitably, designing a CBDC involves a continuous process of compromise. Therefore, it is
important to put more effort to forge a consensus on the appropriate design of a CBDC by
actively communicating with various stakeholders, such as the legislature, the government,
financial institutions, and the public from the early stage of research.
Second, developing a successful CBDC is much more complex than anticipated.
being "too successful" and
There are two opposing risks regarding the success of CBDCs:
crowding out private payment solutions, or being "not successful enough" and generating
insufficient demand.4 In fact, as the experiment progressed, our concerns grew larger on the
latter risk.
Since we, as a central bank, have little experience in providing retail payment services, it is
not easy for us to provide services convenient and innovative enough to satisfy consumers in
the way that fintech players do. Concerns about reputational risk could also make us more
cautious about providing innovative functions. In addition, with there being no solid use case
for CBDCs yet, we cannot give incentives such as bonus rewards that credit cards or other
private payment service providers offer to customers. In this respect, if retail usage is the first
criterion of the success of a CBDC, it would be difficult for us to meet.
Therefore, for the success of a retail CBDC we need to ramp up our efforts for convenience,
versatility, and incentives from the end-user's perspective. And more importantly, we need to
make people understand that building technological infrastructure for a retail CBDC is
necessary to prepare for future changes such as the rise of the metaverse.
Third, it may never be too early to establish effective private-public partnerships for
CBDCs.
There is a consensus that collaboration with the private sector is prerequisite to the success
of a CBDC. However, the devil is in the details, and it could be very tough to figure out exactly
how such cooperation or division of roles should be performed.
At the Bank of Korea, we are currently conducting a follow up experiment jointly with more
than a dozen commercial banks to link with our test system under a virtual environment. They
have been willingly and gratefully cooperating with keen interest, even though no final
decisions on the launch or the design have yet been made.
These private participants have to carry out a lot of tasks including provision of customer
services and compliance with regulations like the Know Your Customer (KYC) rule, and
transaction approvals under a DLT model, even if the CBDC business model is not clear.
When we approach the final phase and see more developments, it is more likely that we could
face difficulties in establishing right governance for the sharing of authority, responsibility, and
costs. Therefore, I believe that it is better to start collaboration with private partners earlier on
to enhance mutual understanding and reach consensus on a desirable way of dividing roles.
Lastly, further exploration of wholesale CBDCs is essential.
After finding several obstacles to the success of a retail CBDC such as a lack of solid use case
in an economy with a well-functioning financial system and limitations of the current state of
DLT to support a retail CBDC, we have found it is warranted to devote more effort to
developing a wholesale CBDC and combining it with a retail CBDC.
Various studies have been conducted on wholesale CBDCs based on DLT in the region that
For
aim primarily at improving efficiency of securities settlement and cross-border payments.
example, studies on payment innovations such as the mBridge and Dunbar projects led by
several Asian economies together with the BIS Innovation Hub are proceeding briskly. The
Bank of Korea
also plans to participate in a project led by the BIS Innovation Hub to improve
cross-border payments.
Some people suggest an ideal division of roles would be that central banks issue a wholesale
CBDC and the private players offer their own stablecoins fully backed by the CBDC.5 Such a
private-public partnership model could lower the costs of issuing a CBDC and take advantage
of capabilities of the private sector in terms of technology and marketing. For such a model to
work effectively, however, it is important that central banks should attain the authority and
capacity to supervise and monitor private money issuers.
Conclusion
Let me conclude.
The Bank of Korea will step up its CBDC-related efforts going forward, but no final decision
has been made as to whether to issue a CBDC. We will make a careful assessment while
considering the results of follow-up research. I think it is still a good idea to proceed cautiously,
even in deciding the design and operation, not to mention the actual introduction of a CBDC.
Many central banks around the world are still reviewing various designs and operation models
without making a final decision.
Against this backdrop, we need to consider the risk that a front runner's design could end up
being out of sync with global standards, as in the case of the videotape format war between
Betamax and VHS in the 1980s, rather than enjoying the first mover advantage. In this regard,
further international cooperation is required to set global standards and ensure interoperability
of CBDCs. It is also necessary to conduct more extensive studies on potential risks caused
by a CBDC such as disintermediation and digital runs, and impacts on the transmission
channels of monetary policy.
In closing, another reason I have taken interest in CBDC personally is that I think CBDC could
serve as a golden opportunity to strengthen regional financial cooperation. CBDCs could
contribute to integrating global and Asian financial markets and act as a catalyst in developing
regional capital markets, by improving efficiency in cross-border payments. More specifically,
local currency bonds can be settled on a Delivery versus Payment (DvP) basis using local
currency CBDCs, lowering cross-border and cross-currency transaction costs and risks, not
to mention alleviating the third time zone problem.6 And using distributed ledger technology
(DLT) may make it possible to settle cross-border securities transactions without relying on
global custodian banks and securities depositories. Such changes will allow us to overcome
the many legal and political issues as well as the insufficient market infrastructure which have
been major obstacles to regional capital market development.
For several decades, Asia has been the engine of global growth in real activity, but not in
financial markets. If we make good use of technological innovation, it will help to develop our
regional financial markets much faster and enable Asia to keep its place as the growth engine
of the global economy going forward, while promoting payment system stability, financial
inclusion and enhancing cross-border payments.
Thank you very much.
References
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Adrian, Tobias, and Tommaso Mancini-Griffoli. IMF
Fintech Notes (January).
www.atlanticcouncil.org/
Atlantic Council. 2022. "Central Bank Digital Currency Tracker."
cbdctracker.
Auer, Raphael, and Rainer Böhme. 2021. "The technology of retail central bank digital
currency." BIS Quarterly Review (March).
Panetta, Fabio. 2022. "A digital euro that serves the needs of the public: striking the right
Speech at the
balance." Committee on Economic and Monetary Affairs of the
European Parliament.
Park, Daekeun, and Changyong Rhee. 2006. "Building infrastructure for Asian bond
markets: settlement and credit rating." Asian Bond Markets: Issues and Prospects.
Bank for International Settlements. 202-221.