As countries around the world consider the launch of central bank digital currencies (CBDC), pilot projects are being conducted to explore the various use cases of digital money in different industries. One such innovative application is the use of a CBDC within the carbon credit market. The Bank of Korea (BOK) and the Korea Exchange have joined forces to investigate this potential, as outlined in a working paper by the Bank for International Settlements (BIS).
The goal of this exploration is to showcase how the world of digital finance is evolving and how these changes can be integrated with eco-friendly policies and projects. The simulated trials for this project are scheduled to take place in the third and fourth quarters of 2024.
Within the CBDC system, CBDCs, tokenized deposits, and tokenized e-monies will be issued and circulated. CBDCs play a crucial role as anchors in the CBDC ecosystem, facilitating seamless exchanges between tokenized deposits and tokenized e-monies. The CBDC system will also be interconnected with external systems, tailored to specific use cases such as carbon credit exchanges.
Interlinking with Carbon Credit Exchange
The BIS notes that the CBDC system can be interlinked with a carbon credit exchange. By utilizing a payment token issued solely for use within the designated ledger, the system can ensure smooth transactions involving tokenized assets like carbon credits. This allows for the simultaneous execution of delivery and payment processes in a Delivery versus Payment (DvP) manner.
Preparing for the Future
The Bank of Korea acknowledges that the immediate issuance of a CBDC is not necessary. However, they believe it is crucial for the country and its citizens to be prepared should a digital currency be issued in the future. With numerous countries and central banks exploring CBDC issuance, the Bank of Korea recognizes the likelihood of needing to issue a CBDC within the next five to ten years.
Pilots for CBDC Implementation
To ensure quick decision-making regarding CBDC introduction, the BOK has launched several pilot projects. These preparations are driven by factors such as the decline in cash usage, concerns about the market dominance of big tech companies, and the increasing acceptance of global stablecoins. The BOK aims to conduct in-depth studies on CBDC architecture and implementation to minimize disruption to consumers and position CBDC as a universal public currency infrastructure supporting the digitalized economy.
Korea Exchange’s Role
The Korea Exchange is currently conducting simulated experiments using distributed ledger technology (DLT) and plans to support listed security tokens in the future. This collaboration between the BOK and the Korea Exchange signifies a move towards digitalization and demonstrates the integration of technology into financial practices. The Korea Exchange recognizes the global trend of research on distributed ledger technology and aims to contribute to the development of the financial market infrastructure.
Both the Korea Exchange and BOK emphasize that this collaboration is a test and will not impact the functioning of current carbon credit markets. Further details of the partnership will be shared in the coming month.