South Korea to pilot tokenized bank deposits for spending

The South Korean government announced a pilot to use blockchain-based tokens that represent commercial bank deposits for selected government payments and budget disbursements. Transactions in the test will be recorded on a permissioned blockchain to enable faster settlement and audit trails.

Under the pilot, participating commercial banks will create tokenized versions of customer deposits and transfer those tokens to government accounts or to beneficiaries. Recipients will be able to hold, transfer or redeem the tokens back into regular deposits. Transaction records will be visible only to authorized public bodies and participating institutions on the permissioned ledger.

The initial tests will be limited in scope, focusing on specific types of spending and a small number of banks and agencies. Regulators plan to evaluate technical reliability, data protection, anti-money-laundering controls and how the tokens work with existing banking systems. The pilot will also examine legal and accounting treatments and how consumer protections apply when funds exist as tokens on a ledger.

Officials said the deposit token initiative is separate from central bank digital currency work. The tokens are expected to represent liabilities of commercial banks rather than central bank money and would be issued and redeemed by banks under rules agreed with government bodies. The pilot aims to clarify operational roles and regulatory responsibilities between tokenized commercial deposits and any potential central bank digital currency.

South Korea has run prior trials of digital and blockchain technologies, including research on a central bank digital currency and municipal projects for digital records and identity services. Those efforts informed technical design and governance considerations for the deposit token pilot.

Regulators will require identity checks and compliance safeguards during the test to reduce the risk of misuse. The government highlighted privacy, cybersecurity and system resilience as key areas the trial must address. Participating banks will be responsible for implementing customer protections and settlement guarantees during the pilot.

Results from the pilot will determine whether to expand the use of deposit tokens for broader government spending or to propose permanent rules for their issuance and oversight. The government said it will publish findings and recommendations after the initial testing phases and coordinate with financial regulators on any regulatory or legislative changes.