South Korea’s Shift from CBDC to Private Stablecoins: A New Financial Era

South Korea’s central bank, the Bank of Korea (BOK), has recently suspended its central bank digital currency (CBDC) pilot program, redirecting its focus toward a private-led stablecoin initiative. This decision comes amidst significant pressure from commercial banking partners who raised concerns over the high costs and lack of a sustainable business model associated with the state-backed CBDC project, known as "Project Han River." As reported by The Korea Herald, the initial phases of the project, which included both a wholesale CBDC for interbank settlements and tokenized deposits for retail use, faced financial hurdles that ultimately led to its suspension.

Launched earlier this year, Project Han River involved seven participating banks, which collectively spent approximately 35 billion won (around $26 million) during its three-month pilot phase. However, the banks expressed unwillingness to proceed without a clear path to profitability. The BOK’s attempted offer to cover half of the costs for a second phase was rejected, indicating that the banks’ concerns transcended financial burdens and pointed to fundamental issues with the viability of the initiative.

In the wake of this halted state-led initiative, a consortium of eight major commercial banks—including notable entities like KB Kookmin, Shinhan, and Woori—has come together to develop a new won-pegged stablecoin. This move is bolstered by the Korea Financial Telecommunications and Clearings Institute (KFTC) and is aimed at launching before late 2025 or early 2026. The banks perceive a significant commercial opportunity in issuing stablecoins that could leverage their existing customer base and generate new revenue streams, all while safeguarding their market positions against potential competition from fintech disruptors and state-controlled currencies.

The strategic pivot towards a bank-led stablecoin initiative has been facilitated by a change in government policy under President Lee Jae-myung. Since campaigning on a pro-crypto platform, the administration has committed to advancing legislation that includes the approval of won-pegged stablecoins. They are currently fast-tracking the “Digital Asset Basic Act,” which seeks to establish a legal framework for stablecoins, with regulatory authority assigned to the Financial Services Commission (FSC) instead of the BOK. Remarkably, the act lowers the capital requirement for issuing stablecoins to ₩500 million (approximately $370,000), thereby encouraging competition among financial institutions.

In preparation for this market evolution, commercial banks have swiftly acted to secure their positions. For instance, KB Kookmin has filed trademarks for 17 different stablecoin tickers, indicating its readiness to capitalize on the opportunities presented by this shift. Meanwhile, Shinhan Bank has been laying the groundwork for the transition, conducting proofs-of-concept for international remittances using stablecoins dating back to November 2021. These proactive measures signal an aggressive approach to adapt to the changing financial landscape and communicate their commitment to innovation.

Despite the excitement surrounding the potential for won-backed stablecoins, BOK Governor Rhee Chang-yong and other central bank officials have raised concerns regarding the implications of private stablecoins on the broader economy. They caution that an influx of these digital currencies could disrupt monetary policy, exacerbate systemic risks akin to the 2022 Terra/Luna collapse, and even trigger capital flight as users might opt for more stable dollar-pegged alternatives. In the first quarter of 2025 alone, the volume of USD-pegged stablecoin transactions in Korea reached ₩56.95 trillion (approximately $41.6 billion), amplifying these concerns.

In light of these discussions, the BOK has reframed its discontinued CBDC project as a potential "countermeasure" to the burgeoning private stablecoin market. Officials have indicated that they may revive their CBDC efforts if the volatility in the private sector proves detrimental to the financial ecosystem. The central bank is advocating for a cautious approach, suggesting that initially, only highly regulated banks should be permitted to issue stablecoins before expanding this capability to non-bank entities.

As South Korea navigates this critical transition from a government-backed digital currency initiative to a private-led stablecoin approach, the implications for the financial industry, regulatory bodies, and consumers will be profound. The evolution reflects a global trend of digital currency adoption while also highlighting the delicate balance between innovation and regulation. In this new era, the strategic actions of commercial banks, the response of policymakers, and the sentiment of the public will determine the success of South Korea’s digital currency landscape.