Why is South Korea pilot-testing its Central Bank Digital Currency (CBDC), and what made it shift from non-issuance to consideration? This paper investigates the Bank of Korea (BOK)’s CBDC-related developments amid the geopolitical contest between the U.S. and China.
It examines the Moon Jae-in administration’s defiance of decentralized finance (DeFi) and the BOK’s sudden shift from non-issuance to potential issuance, which led to expedited research, development, and pilot-testing of CBDCs.
As in the case of the digital yuan, the BOK envisions a hybrid architecture for the digital won, wherein central banks and associated partner institutions are CBDC distributors, though they are distinguished by placing the digital won on distributed ledger technology rather than by centrally controlling it.
However, South Korea’s previously rash decision to forego DeFi under an undemocratic process has deprived the country of the time and opportunity to develop new innovations as a leading country in the digital frontier. By sticking only to digitalizing centralized finance, the country now aims to be in “standby” mode for its CBDC launch if and when required, so as not to fall behind in digital financial architecture. This paper scrutinizes the South Korean government’s moves on crypto and CBDCs and argues that 1) the Moon administration has shown incapability in addressing DeFi amid the crypto boom and bust, and 2) the BOK’s shift from non-issuance to potential issuance of the digital won is driven by its interest to uphold central bank independence amid swaying geopolitics between the U.S. and China and an unpredictable upcoming presidential election in South Korea.