The currency exchange and settlement procedures that foreigners must go through to buy Korean government bonds could be simplified in the future. The Bank of Korea (BOK) has presented a plan to develop its deposit token experiment, "Project Hangang," into next-generation payment and settlement infrastructure that would encompass treasury fund execution, bond tokenization, and cross-border settlement.
BOK Governor Hyun Song Shin unveiled this direction at the European Central Bank (ECB) Forum on Central Banking held in Sintra, Portugal, on Tuesday, where he presented a paper titled "The Unified Ledger in Practice: Lessons from Project Hangang." "The next stage of monetary innovation is tokenization, which can embed transaction conditions and execution rules into money," Shin explained. "Tokenized money becomes 'smart money' that carries promises and procedures as well."
The stage he presented is the "unified ledger." It is a method of trading assets such as central bank digital currency, bank deposit tokens, and government bonds on a single digital ledger. Currently, the timing of payment and asset transfer can diverge in asset transactions, but on the unified ledger, the two processes are handled simultaneously, reducing settlement risk.
Shin viewed a deposit token system involving both central banks and commercial banks as more suitable than private stablecoins. Stablecoins are designed to have their value fixed to fiat currencies such as the dollar or the won, but their value can deviate if trust in the issuer wavers or a market shock occurs.
In particular, he pointed to the cost problem of decentralized public blockchains. "A decentralized blockchain that anyone can participate in must continuously reward validating participants, and the more stability is enhanced, the more costs and fees soar," Shin said. "Users scatter in search of cheaper options." By contrast, he explained, a structure in which the central bank provides the foundation of trust and commercial banks issue deposit tokens can maintain the singleness of money while lowering costs.
Project Hangang is a project in which the BOK tested this concept in an actual settlement environment. From April to June last year, the BOK conducted a deposit token payment experiment with seven banks, involving about 80,000 users and 12,000 merchants. In the real-transaction pilot, 81,000 people participated based on electronic wallets, and a total of 114,880 transactions were carried out, including payments and conversions between deposits and deposit tokens.
The next test is government fiscal execution. In the second-stage experiment in the second half of this year, the BOK plans to apply the programming function of deposit tokens to items such as subsidies for building electric vehicle charging infrastructure and public-sector business promotion expenses. If conditions are attached so that qualified businesses can use funds only for permitted purposes and within a set period, the burden of after-the-fact inspection and the risk of misuse and abuse can be reduced.
In the long term, it could also expand into infrastructure for foreigners' investment in Korean government bonds. Currently, foreigners must conduct currency exchange and bond settlement separately to buy Korean government bonds. But if Korean government bonds are tokenized on the Project Hangang platform and linked to "Agora," an international joint settlement project, foreign exchange settlement and bond settlement could be bundled as if they were a single transaction.
However, actual commercialization is expected to take time. Challenges remain to be resolved, including the scope of won transactions by non-residents, cross-border settlement rules, and how to link with the existing real-time gross settlement system. "This is not at the stage of specifically deciding how to proceed, but should be seen as a vision to consider going forward," a BOK official said.
