South Korea: Central Bank Report States CBDCs Could Reduce the Role of Commercial Banks

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On March 26, 2019, South Korea’s central bank published 2018 Annual Payment Settlement Report. In the report, the country’s apex bank has given a summary of research it conducted on central bank digital currencies (CBDCs).

Promising Future for Crypto Assets

South Korea is one of the global hotbeds when it comes to cryptocurrencies. The peninsular country is arguably one of the leading crypto-friendly countries not only in Asia but in the world.

South Korea’s apex bank, the Bank of Korea, in its 2018 Annual Payment Settlement Report draws various interesting conclusions regarding CBDCs.

According to the report, the general sentiment among the Korean experts towards crypto assets is quite positive.

The report states that at present, instability and inefficiency are the Achilles Heels for cryptocurrencies. However, the report adds that according to Korean experts, crypto assets have a promising future in the country and could one day see widespread use.

In the report, the authors note that other than enabling transactions between large financial institutions and banks, CBDCs can be used to make micropayments too.

The document identified the ability to track transactions via distributed ledger technology (DLT) as one of the main advantages of CBDC. Further, the authors believe that blockchain-powered CBDCs are significantly more secure for the settlement of payments courtesy of the technology’s characteristic of immutability. This means that once a payment is made it cannot be canceled or altered in the future.

The report, however, notes that CBDCs might not necessarily reduce the time required for the transfer of funds.

Could CBDCs Replace Commercial Banks?

There have often been speculations about the way CBDCs could impact the functioning of a country at a macro-economic level.

Against that backdrop, the report by the Bank of Korea posits that the issuance of CBDCs could have an impact on the country’s monetary policy and financial stability in that it could weaken the intermediary role played by commercial banks. The report concluded that deposits with banks could run the risk of falling low because a lot of financial institutions would prefer to keep their holdings in the form of CBDCs.

Concluding, the report reiterates the Bank of Korea’s decision to not launch its own CBDC. The bank will, however, continue to research in the field of CBDCs with an aim to reduce the use of cash in the country and keep a close eye on virtual currency trends.

With that said, it remains to be seen what approach other countries follow with regard to CBDC.

As previously reported by BTCManager on November 15, 2018, International Monetary Fund (IMF) Managing Director, Christine Lagarde urged central banks the world over to explore the option of issuing digital currency.

The international organization has also, in the past, been highly supportive of the benefits of blockchain technology.

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