South Korea's and Japan's Central Banks will start testing their CBDCs in 2021

Bank of Korea and Bank of Japan taking the stage for the Central Bank Digital Currency (CBDC) tests early next year.

As I mentioned in my article “China expands its Digital Yuan testing to Hong Kong and Macau” (Challenger Insider, September30), in April, after several years of work (the research started in 2014), the Chinese Government announced the starting of the tests of the country's central bank digital currency (CBDC), DCEP (Digital Currency Electronic Payment), in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an).

On August 14, China's Ministry of Commerce announced that a pilot run a pilot run of the country’s (CBDC) will begin in several new areas very soon, including the Greater Bay Area (GBA), which brings together the two special administrative regions of Hong Kong and Macau plus nine municipalities in the Guangdong province (Guangzhou, Shenzhen, Zhuhai, Foshan, Dongguan, Zhongshan, Jiangmen, Huizhou, and Zhaoqing).

If DCEP proves to be viable, it will imply a breakthrough: China will be the first country having successfully implemented a State-run digital currency.

However, China is not the only country exploring or even testing its own CBDC. Actually, according to a report published by the Bank of International Settlements (BIS) in early 2020, 80% of Central Banks in the world are working on CBDCs (in some cases, they are just starting to do research on it, while in some other cases, such as China, the work is much more advanced).

For the purpose of its report, the BIS made a differentiation regarding the nature of the CBDC to be ushered in by central banks. Wholesale or “token-based” CDCs were classified as “restricted-access digital token(s) for wholesale settlements”, which could be used for “interbank payments or security settlements”. Conversely, general purpose CBDCs were classified as “CBDC available to the general public”, which would in effect be subject to the tokens and/or accounts held by individual citizens. By large,the use of general purpose CBDCs would be for retail payments.

Furthermore, the COVID-19 pandemic is turbo charging digitalization in general, and the interest in virtual currencies inparticular.

Nevertheless, Asia seems to be the place where CBDCs arouse more interest. Aside from China, many other Asian countries have shown their interest in developing and potentially deploying their own CBDCs. This list includes countries like Thailand, Cambodia, Vietnam, Philippines… as well as Korea and Japan.  

In this article, I will focus on the last two, Korea and Japan.

As to South Korea, the Bank of Korea (BOK- which is the central bank of the Republic of Korea and issuer of the won) announced on October 7 that it will being the distribution phase of its CBDCpilot scheme next year, in 2021, according to an article published in The Korea Times. The goal of said pilot scheme will be to test whether their CBDC can be successfully launched or not in the future. This test operation comes at the end of two years of research conducted by the BOK, whose digital currency research team plans to open a server and carry out the experiment.

The BOK is in the analysis phase of the project, which is the second phase in a three-step process. The virtual issuance and circulation of CBDC is part of the final phase that is planned to start early next year. 

The Bank of Korea has yet to enter such an advanced level of talks with commercial payment platform operators or fintech companies over its digital currency. Details over partnerships with the commercial sector are expected to be announced after the BOK finishes the pilot test of the virtual CBDC issuance in 2021. Despite solid progress on the pilot program, the Bank of Korea maintains that the tests do not necessarily mean it will go ahead with the CBDC launch.

Also, according to The Korea Times, the BOK said it will simulate transactions on a blockchain platform that would be similar to those for cash or traditional means of payment. 

Regarding Japan, the Bank of Japan -BOJ- (Japan's central bank) published on October 9 a press release stating that Japan's CBDC tests will start in early 2021. The BOJ will create a system onthe internet, where the basic functions of the CBDC, including its issuance and circulation, will be tested. Afterwards, the BOJ will work on more advanced experiments.

Although the BOJ has said that it has no plans to issue a CBDC, it will step up preparations in response to moves by China, and Prime Minister Yoshihide Suga's policy focus on digitalization.

The BOJ assumes that private financial institutions will take an intermediary function for a CBDC that may be issued by the Japanese central bank, and that the digital currency will be used widely by general consumers, companies and others. 

The test will be held in three stages. The final stage of the test will involve private businesses and consumers to examine the feasibility and safety of the digital currency as a method of payment on par with cash.

This BOJ paper outlined, among others, the next things: the growing need for digital payments in a more digitalized age, considering the declining use of the cash as well as the rapid development of technology and innovation; the expected functions and roles of a digital yen; the core feature the key functional and economic considerations – e.g. CBDCs relationship with price financial stability, privacy, etc., and BOJ’s co-operation with other central banks.

To sum up, it is way too early to know whether the CBDC tests in Korea and Japan will be successful or not (and, even if successful, none of the two countries has actually committed to deploying their own CBDCs in the end), but it is relevant to see that many more countries in Asia other than China are moving towards making our world more digital. China is undoubtedly leading the CBDC race in Asia, and in the world, which will allow China's neighboring economies (among which Korea and Japan are included) to learn from China's CBDC experience. Asia is transforming into an innovation powerhouse, there is no doubt of that.

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