The Bank of Korea and the South Korean government are set to test a digital currency for distributing national treasury subsidies, with six major banks participating, as regulatory frameworks for stablecoins are being developed.

Executive Summary

South Korea is advancing its digital currency initiatives with a pilot program for distributing government subsidies using a central bank digital currency (CBDC). This move coincides with the development of a regulatory framework for Korean Won (KRW)-backed stablecoins, signaling a strategic shift towards digital asset innovation led by established financial institutions.

The Event in Detail

The Bank of Korea (BOK) and the South Korean government plan to distribute over 110 trillion won (approximately $79.3 billion) in government subsidies using a CBDC as part of the “Han River Plan” pilot project. This initiative aims to enhance the efficiency and transparency of fiscal policy. Six major Korean banks, including KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, and the Industrial Bank of Korea, have expressed interest in participating in the pilot. The CBDC tokens will replace traditional bank transfers or vouchers, with the flow of these tokens tracked using blockchain technology to prevent misuse.

Market Implications

The pilot program and the broader push for KRW-backed stablecoins could significantly impact South Korea's digital finance landscape. A coalition of eight major commercial banks is developing a won-pegged stablecoin, expected to launch by late 2025 or early 2026. The Financial Services Commission (FSC) is accelerating the introduction of a regulatory framework for these stablecoins, with a bill expected to be submitted to parliament by October 2025. This framework will mandate strict collateral management, reserve transparency, and internal controls, aiming to reduce reliance on U.S. dollar-pegged stablecoins. The "banks-first" model minimizes systemic risk and aligns with global trends.

Expert Commentary

Paying subsidies with digital legal tender will help main contractors better manage funds when signing agreements with subcontractors.

According to South Korea’s Hankyoreh, the plan was proposed by the Ministry of Strategy and Finance, marking the central bank’s restart of CBDC-related plans after previously suspending CBDC testing. Deputy Prime Minister and Minister of Strategy and Finance Koo Yun-cheol stated that this move will significantly improve the efficiency and transparency of subsidy payments.

Broader Context

South Korea's approach contrasts with other nations that are further along in CBDC development. The move to suspend its CBDC project in favor of stablecoin innovation indicates a strategic pivot. The FSC's regulatory framework will require full collateralization, bank-held reserves, and real-time AML/KYC compliance. Government-backed KRW stablecoins aim to replace the dollar-dominated market, leveraging fintech giants and Web3 startups to drive adoption in e-commerce and cross-border payments. Blockchain technology is seen as key to improving transparency and accountability, mirroring examples like the World Food Programme's "Building Blocks" platform, which uses blockchain for efficient and secure cash transfers to refugees.