South Korean authorities are to chart out a new era of digital payments, carrying out a pilot test for a central bank digital currency, or CBDC, to determine how it could be used as savings and transactions vehicles, according to an announcement made by related authorities on Wednesday.

From the fourth quarter of next year, not only banks and other financial institutions, but also individuals will be able to test out the CBDC platform under a pilot program.

The Bank of Korea, Financial Services Commission and Financial Supervisory Service jointly announced the pilot project to test the introduction of the CBDC.

The CBDC, a digital form of central bank money, is equivalent to the state currency. It serves as digital payment divided into mainly two types: the wholesale CBDC for institutions and retail CBDC for individuals.

“Creating an ecosystem of payments through the wholesale CBDCs and tokenized deposits can support the transaction of digital assets such as security token offerings, improving the efficiency of the current payment settlement system,” Kim So-young, vice chairman of the Financial Services Commission, said at a press briefing held at the bank’s headquarters in central Seoul on Wednesday.

Bank of Korea Senior Deputy Gov. Ryoo Sang-dai and Financial Supervisory Service First Senior Deputy Governor Lee Myung-soon also attended the event.

The upcoming test will be conducted first for wholesale CBDCs, having commercial banks utilize the payment instrument for interbank transfers of funds and final settlements among financial institutions.

The BOK explained the process is similar to how commercial banks currently utilize reserves at the central bank to facilitate such transactions. The test, which will kick off this month, will be carried out until the end of 2024, tentatively.

Only commercial banks will be able to participate in the test for the time being, in consideration of compatibility with current laws, authorities said.

For the general public, authorities plan to launch a test for the retail CBDC, allowing individuals to experience the new digital payment vehicle on a limited scale.

Retail testing is expected to take place around the fourth quarter of next year, but the exact timeline or method has not been settled yet.

“The introduction of retail CBDC requires technological preparation. Though it utilizes the same technology as the wholesale CBDC, there needs to be improvement in terms of payment speed and more,” said Lee Han-nyong, head of the payment and settlement systems department at the BOK.

The introduction of a CBDC could lead the digital transition of finance and expand the currency infrastructure, according to authorities.

For instance, it could help the government improve its fiscal soundness. While some did not use subsidies given out during the pandemic for consumption purposes, through the utilization of the CBDC, the government could provide the relief funds through a digital voucher and have them used for their intended purpose.

Local authorities stressed they have cooperated with the Bank for International Settlements on the CBDC introduction from the beginning. The BIS advised on the network setup, marking the first time for it to be involved in a country's pilot testing of a CBDC, the authorities said.

“Korea is one of the top countries in terms of information technology. Diverse types of payment services are utilized here. The outstanding infrastructure allowed the cooperation with the BIS,” Lee said.

According to the BIS, more than half of the central banks around the world are conducting pilot projects related to a CBDC as of July. More than 24 countries are expected to officially introduce a CBDC by 2030.

In October, the BOK, FSC and FSS are to hold an explanatory session for information technology system integrators and banks. Authorities are to disclose details on the project, including a list of participating banks, at the end of November.

The CBDC test, however, does not directly imply that South Korea has decided to officially adopt the payment instrument, the authorities stressed.