Hyun Song Shin: wants to expand the use of CBDC and tokenised deposits I Credit: Daniel Bernard (Unsplash) & BIS

Digital payments innovation including central bank digital currency (CBDC) and the internationalisation of the Korean won has been highlighted by the Bank of Korea (BOK)’s new governor in his inaugural address.

Hyun Song Shin, a well-known figure among central bankers globally via his innovation-related work in former roles at the Bank for International Settlements (BIS), was speaking to kick off a four-year term in the central bank’s top job.

He outlined four priorities: to conduct monetary policy with “prudence and flexibility” and continue efforts to enhance its effectiveness; to approach financial stability “with a new lens” and “strengthen early-warning capabilities” as the boundaries between banks and non-banks, and between domestic and cross-border activities, are “blurring rapidly”; to drive internationalisation and innovation; and to “play an active role in addressing structural reform challenges facing our economy.”  

The innovation-related priorities are consistent with Shin’s work at the Switzerland-headquartered BIS, where he was part of the management team that created the BIS Innovation Hub (including acting as interim head at its launch in 2019). BOK is one of seven central banks involved in the Innovation Hub’s major cross-border tokenisation initiative ‘Project Agorá’ (Greek for ‘marketplace’) announced two years ago.

“Through international cooperation, including Project Agorá, we will strengthen the role of the won in the digital payments environment,” Shin – who had been closely involved with the project at the BIS – said in his speech (21 April).

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Internationalisation and innovation

The third priority has the most obvious crossover with Shin’s BIS innovation-related work. 

“Preserving trust in money and ensuring the integrity of payment and settlement systems is a key responsibility of central banks in today’s globalised and digital financial environment,” Shin – a former academic who worked as a presidential adviser in South Korea 16 years ago before joining the BIS – told the audience.

“The internationalisation of the Korean won is a key task in building a monetary infrastructure commensurate with the stature of our economy,” he continued. “In cooperation with the government, we will pursue 24-hour foreign-exchange market operations and establish offshore won settlement systems. This will improve the accessibility and resilience of foreign-exchange transactions, consistent with international standards. These efforts will support won-denominated capital and trade transactions, enhance the currency’s international standing, and contribute to the orderly development of the foreign-exchange market.”

“We must also prepare in advance for the design of the future monetary system in response to digital financial innovation,” he continued, cueing up a mention of ‘Project Hangang’.

Project Hangang (named after the river that flows through capital city Seoul) is a BOK pilot project testing a so-called ‘unified ledger’ integrating wholesale CBDCs and tokenised deposits. The concept of a unified ledger was first aired by then-BIS general manager Agustín Carstens in a speech in February 2023 (it was then detailed in a special chapter of BIS’s annual economic report in June 2023).

RELATED ARTICLE BIS releases ‘game-changing’ blueprint for global financial system – a news article (20 June 2023) on the special chapter of BIS’s 2023 annual economic report detailing the unified ledger

Project Hangang’s evolution

The BOK, Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) – in cooperation with the BIS – jointly announced a project to ‘explore a future monetary system for Korea’ in October 2023.

A BOK and BIS joint report, ‘A step toward new financial market infrastructure: Bank of Korea’s initiative’, was published the same month (October 2023). This specified four overarching objectives, including – at a general population level – deflecting Koreans’ ‘considerable interest’ in cryptocurrencies.

The BOK had already conducted CBDC experiments, with a focus on exploring a retail CBDC (a central bank digital currency for general population use).

“Through the second phase of Project Hangang, we will expand the use of CBDC and tokenised deposits, and through international cooperation, including Project Agorá, we will strengthen the role of the won in the digital payments environment,” Shin – who has succeeded Rhee Chang-yong as governor – said in his speech.

“As safeguards are needed to ensure that the internationalisation of the won and innovation in the monetary system do not undermine financial stability, we will continue discussions on a macroprudential framework suited to this changed environment,” he said. “In this way, we will work with the government to ensure that the internationalisation of the Korean won, payment and settlement innovation, and the macroprudential framework form a mutually reinforcing triad that generates synergies.”

RELATED ARTICLE South Korean authorities explore ‘unified ledger’ for CBDC– a news story (18 October 2023) on the BOK, FSC and FSS joint-announcement

Government expenses and blockchain

South Korea’s Ministry of Finance and Economy, meanwhile, is to test blockchain-based deposit tokens for government expenses, according to media reports.

A blockchain is a shared, immutable digital ledger that records transactions across a decentralised network of computers

The ministry is to run a pilot project to replace government expense (purchasing) cards with deposit tokens later this year, according to media including Korean-language digital news brand Khan (Kyunghyang Shinmun) and EN-language online news source The Block (16 April).

A ministry press release (available in Korean only) explained that, currently, government departments execute business spending and other related expenses with government-issued credit or debit cards.

‘When processing expenses with deposit tokens, we can pre-set allowable usage times and permitted categories of spending, enhancing overall transparency,’ the release stated.

Experimentation will reportedly centre on Sejong City (Sejong-si), the purpose-built administrative ‘smart’ city that is home to the ‘Government Complex Sejong’.