'110 trillion won' digital currency experiment resumes… Lee Chang-yong "Banks that won't invest, stay out"

The Bank of Korea said it will pursue a government project to distribute some 110 trillion won in government subsidies as a digital currency as a detailed part of the second phase of the Hangang project. Aimed at banks that voiced dissatisfaction with investment amounts in the first-phase project, it said, "This project will be carried out only with banks that are willing to invest."

Lee Chang-yong, governor of the Bank of Korea, said on the 28th at a press briefing after the Monetary Policy Board meeting on monetary policy direction, in response to a question about the government's announcement to pay government subsidies in digital currency, "(It will be carried out) as part of the second phase of the 'Hangang' project (the Bank of Korea's digital currency project)."

This project will pay part of government subsidies totaling 112 trillion won in digital currency instead of cash or vouchers. Using blockchain technology, the aim is to prevent subsidies from being used inappropriately and to reduce administrative and financial costs associated with managing them.

The digital currency will be issued by commercial banks based on the Bank of Korea's central bank digital currency (CBDC) and a blockchain system, and transferred to beneficiaries' e-wallets (smartphone apps). The currency will be linked to the existing monetary value and can be checked and managed in real time on the Bank of Korea's digital ledger, the blockchain.

The difference from the Bank of Korea's CBDC is that its usage is restricted. While a CBDC can be used anywhere like cash, the government's digital currency can only be transacted between beneficiaries and businesses related to government subsidies.

Governor Lee explained, "If subsidies are paid in digital currency, it is possible to program them so that the prime contractor can pay a subcontractor directly when contracting, or so that subsidies for a specific project can only be used to pay related firms," and added, "Deputy Prime Minister Koo Yun-cheol gave this suggestion when he visited the Bank of Korea recently."

Governor Lee also made clear that this project will proceed with only some banks. He said, "Because the scale exceeds 110 trillion won, there will be incentives for banks to participate," and "Based on the experience of the first-phase project, we will not open it to all banks but will focus on banks that intend to invest."

This appears to be a remark mindful of complaints that participating banks raised to the Bank of Korea over infrastructure investment costs in the first-phase project, which ran until July. At the time, some banks protested, saying, "The Bank of Korea pushed the infrastructure build and merchant acquisition onto the banks and only urged them on." The release of that report also sparked controversy.

Inside and outside the Bank of Korea, it is expected that banks that raised complaints then will find it difficult to participate in this project.

Reporter Kang Jin-kyu josep@hankyung.com