South Korea’s central bank, the Bank of Korea, has reportedly suspended its ongoing central bank digital currency (CBDC) trials. The decision comes amid increasing government support for local currency-backed stablecoins, which has captured the attention of participating banks. Local news outlets Yonhap News Agency and The Chosun Daily reported on Monday that the second phase of CBDC testing, originally scheduled for later this year, has been postponed indefinitely.
A senior official from one of the seven banks involved in the CBDC trials told Yonhap that the central bank is pausing to evaluate how a CBDC would align with the government’s emerging stablecoin framework.
Stablecoins Gain Traction Under New Leadership
The shift in focus reflects the priorities of newly elected President Lee Jae-myung, who campaigned on a pro-crypto agenda. Among his promises was the legalization of stablecoins, digital tokens pegged to the value of fiat currencies like the Korean won.
Earlier this month, his party introduced a bill allowing companies to issue stablecoins, provided they meet a minimum equity capital requirement of 500 million Korean won ($370,000). This move signals a clear preference for private-sector solutions over a state-issued CBDC, at least for now.
Banks Dissatisfied with Expensive CBDC Project
Participating banks expressed dissatisfaction with the high costs associated with the CBDC trials, contributing to the suspension. According to an unnamed senior banking official, the second phase of testing was already “on the verge of collapse” due to concerns over expenses and the lack of a clear commercialization plan.
The Bank of Korea reportedly floated the idea of delaying the second phase until the first half of next year and may reduce the number of participating financial institutions.
The first phase of the CBDC trials, which ran from April 1 to June 30, involved 100,000 participants testing payments using the central-bank-issued currency. The second phase was intended to expand merchant participation and introduce remittance functionalities.
Korean Banks Prioritize Stablecoin Development
Rather than continuing with the CBDC project, many banks are now eager to explore stablecoin issuance, which offers a more straightforward path to profitability.
On Wednesday, reports emerged that eight South Korean banks are collaborating to launch a won-backed stablecoin by next year. Notably, four of these banks—KB Kookmin, Shinhan, Woori, and NongHyup —also participated in the first phase of the CBDC trials.
This pivot underscores the growing appeal of stablecoins among financial institutions, particularly as regulatory clarity and government backing make them a viable alternative to CBDCs.
Mixed Reactions in South Korea’s Fintech Market
The news of the CBDC suspension and banks’ shift toward stablecoins triggered mixed reactions in South Korea’s fintech sector.
Shares in some fintech companies fell sharply on Monday. KakaoPay Corp, a leading mobile payment app, dropped 7%, while payments firm Hecto Financial declined around 5% as of 2 p.m. local time.
Conversely, traditional banks saw modest gains. KB Financial Group, the parent company of KB Kookmin, rose 0.8%, while Shinhan Financial Group climbed 1.6%. These gains likely reflect investor optimism about the potential profitability of stablecoin initiatives.
What’s Next for South Korea’s Digital Currency Landscape?
The postponement of CBDC trials highlights the evolving dynamics of South Korea’s digital currency ecosystem. While the government explores stablecoin regulations, banks are increasingly drawn to the financial opportunities presented by privately issued tokens.
The Bank of Korea’s decision to reassess its CBDC strategy suggests it may take a backseat to private innovation in the short term. However, the central bank’s ultimate role in shaping the country’s digital currency future remains uncertain.
As South Korea navigates this transition, the interplay between stablecoins and CBDCs will likely shape the nation’s monetary policies and financial infrastructure for years to come.
Conclusion
South Korea’s pause on CBDC trials marks a significant shift in its approach to digital currencies, driven by the allure of stablecoins and their potential economic benefits. With banks prioritizing stablecoin development and the government advancing supportive legislation, the country appears poised to embrace private-sector solutions over a state-issued CBDC—at least for now.
However, as the global debate over digital currencies continues, South Korea’s decision could serve as a case study for other nations weighing similar choices. For now, all eyes remain on how the country’s stablecoin initiatives unfold and whether the CBDC trials will eventually resume.
