Today the Bank of Korea (BOK) released a request for bids inviting firms to pitch to become the technology provider for a central bank digital currency (CBDC) based on distributed ledger technology (DLT) and shared quite a few details.
BOK had previously announced trials for a digital won, and multiple Korean firms have been lobbying to participate. For example, it has been reported that BOK had CBDC discussions with the Klaytn public permissioned blockchain and Hyundai HDAC about digital currency custody.
In conjunction with LG CNS, South Korea’s Shinhan Bank completed a CBDC demo which was not commissioned. Subsequently, the bank became a member of Hedera Hashgraph’s governing council. The latter shares a similar governance structure to Klaytn, in that a limited number of approved large firms can write to the ledger. It also features low cost transactions.
Meanwhile, the latest Bank of Korea announcement says the DLT-based simulation project runs for ten months. The main first phase will run from August to December.
Korea’s simulated CBDC will have a two-tier structure with the central bank issuing the currency and financial institutions performing the distribution.
The first phase involves the creation, issuance and redemption of the digital currency. Issuance will happen within the central bank’s secure computing environment, which is physically disconnected from the network. It will then be issued to an institution’s electronic wallet in exchange for deducting money from the institution’s central bank account. And redemption works similarly but in reverse.
This initial phase will trial some basic use cases. Hence, it includes end-user wallets such as smartphone apps and secret key storage to make smaller payments. Exchanging bank deposits for the CBDC is one of the functionalities to be tested. And the most important use case to be simulated is using the digital currency for payments.
If all goes well in the first phase, a second phase will involve cross border remittance, offline payments, regulatory compliance, and integration with systems for buying digital assets, not just securities but also art works and other intellectual property.
At a more technical level, the second phase also involves trialing privacy enhancing technologies (PET). No specific PET’s were mentioned, but in the blockchain world, Zero Knowledge Proofs are the most popular. Additionally, it will explore programmable money using smart contracts. For law enforcement purposes, the central bank wants to be able to freeze an electronic wallet.
Apart from the December deadline for the first phase, it wants to complete the functionality for protecting personal information by February 2022. The total budget for the project amounts to Won 49.6 billion ($44 million).