The Impact of CBDC on South Korea’s Financial Ecosystem

Executive Summary

On April 1, 2025, the Bank of Korea will launch “Project Han-Gang,” an ambitious real-world pilot designed to test the use of Central Bank Digital Currency (CBDC) and deposit tokens. Over the course of three months, approximately 100,000 citizens will participate in a controlled ecosystem where traditional bank deposits are converted into digital tokens for daily use. This initiative is not merely a technological experiment; it is a systemic exploration of how digital currency could reconfigure the foundations of Korea’s financial system. This paper examines the structural shifts that Project Han-Gang may precipitate in payment systems, institutional roles, financial inclusion, public policy, and user privacy. It also proposes strategic directions to mitigate associated risks and capitalize on emerging opportunities.

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1. Introduction

The financial sector in South Korea stands at the brink of a major transformation. As digital innovation accelerates across global economies, central banks are increasingly turning toward Central Bank Digital Currencies as instruments for future-ready financial infrastructure. The Bank of Korea’s Project Han-Gang marks a pivotal step in this direction. With a focus on real-world applicability, the project will assess the operational viability of CBDCs and tokenized bank deposits under everyday transaction conditions. Beyond testing functionality, this initiative signals a deeper institutional pivot—one that could fundamentally reshape monetary policy implementation, payment market structures, and the delivery of public services.

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2. Project Overview: Scope, Structure, and Stakeholders

Project Han-Gang is characterized by its broad participant base, robust technological backbone, and cross-sectoral collaboration. Citizens participating in the pilot will be allowed to convert up to KRW 1 million of their bank deposits into digital tokens, which they can spend at designated merchants such as convenience stores and cafés. The total payment volume is capped at KRW 5 million per user. All transactions will be processed via QR code and settled in real time, with users retaining the ability to redeem tokens for cash on demand.

The project involves seven major banks—KB Kookmin, Shinhan, Hana, Woori, NongHyup, IBK, and BNK Busan—and is underpinned by Distributed Ledger Technology (DLT), ensuring transaction integrity and traceability. By embedding this infrastructure into existing financial institutions, the Bank of Korea aims to maintain systemic continuity while exploring future-forward models.

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3. Anticipated Transformations in the Korean Financial Ecosystem

3.1. A Paradigm Shift in Payment Infrastructure

The current retail payment environment in Korea is dominated by card networks and mobile payment platforms, where intermediaries extract transaction fees ranging from 1% to 2%. The introduction of CBDC presents a disintermediated model, wherein payments can be settled directly between payer and recipient with minimal overhead.

If adopted at scale, this new infrastructure could reduce transaction costs by up to 50%, as estimated by the Bank of Korea. Furthermore, real-time settlement mechanisms will improve liquidity management for financial institutions, reducing the time lag and operational costs associated with traditional batch processing. In practice, a small merchant may see their processing fees drop to near zero, while consumers could experience indirect price benefits through reduced overhead.

3.2. Expansion of Financial Inclusion and Public Sector Efficiency

Despite Korea’s high digital penetration, segments of the population—particularly the elderly and low-income groups—remain excluded from digital financial services. Project Han-Gang introduces a framework where government-issued benefits, such as disaster relief or welfare payments, can be directly distributed in the form of digital vouchers.

This mechanism not only eliminates intermediaries in the disbursement chain but also enhances policy responsiveness during crises. For instance, a KRW 100,000 emergency grant can be issued, received, and spent within minutes—improving both transparency and user agency. Ultimately, CBDC infrastructure could bridge digital divides while increasing the efficiency of fiscal transfers.

3.3. Heightened Scrutiny of Privacy and Surveillance

One of the more contentious dimensions of CBDC implementation lies in the area of data privacy. Unlike cash, which ensures transactional anonymity, digital currencies inherently record user activity. Project Han-Gang’s architecture allows for all payment data to be centrally stored by the Bank of Korea, raising concerns about government surveillance and the erosion of financial privacy.

While Privacy-Enhancing Technologies (PETs) are being considered to introduce anonymity features, public discourse remains skeptical. Social media platforms already reflect growing anxiety over the possibility of constant monitoring. Without strong regulatory safeguards and user consent mechanisms, this issue could undermine public trust and delay nationwide adoption.

3.4. Institutional Realignment and Redefinition of Banking Roles

Commercial banks currently occupy a dual role in deposit management and payment mediation. The introduction of CBDC and deposit tokens directly challenges this structure by reducing reliance on banks for payment processing.

To adapt, banks must reorient their strategic focus toward higher-value services such as digital asset management, token-linked savings products, and AI-based investment tools. For example, platforms like Hana’s “Hana OneQ” app may evolve into comprehensive financial ecosystems that integrate token-based transactions with broader wealth management features. In this evolving landscape, competition with fintech firms will intensify, requiring banks to accelerate innovation cycles and enhance user-centric service models.

3.5. Enhanced Transparency and Crime Prevention

Project Han-Gang’s traceable design offers a significant advantage in combating illicit financial flows. Cash-based transactions, which currently facilitate tax evasion, underground markets, and money laundering, would face growing constraints in a CBDC-enabled economy.

Real-time transaction visibility empowers regulatory bodies to detect anomalies and intervene promptly. However, this same feature may push some actors toward alternative, unregulated digital assets such as cryptocurrencies. Therefore, while CBDC can strengthen financial integrity and improve tax collection, it may also necessitate stricter oversight of non-sovereign tokens.

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4. Strategic SWOT Analysis

Category	Key Elements
Strengths	• Reduced transaction costs • Operational trust anchored in central bank legitimacy
Weaknesses	• Privacy and data protection concerns • Technical glitches during early implementation
Opportunities	• Innovation in public service delivery • Strategic leadership in global CBDC development
Threats	• Public backlash and erosion of trust • Market friction with private payment providers

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5. Strategic Policy and Institutional Recommendations

5.1. Designing for the User

To maximize public engagement, it is essential to lower barriers to entry and incentivize usage. This can be achieved through introductory benefits such as 5% cashback on CBDC-based transactions. In parallel, comprehensive educational campaigns should be launched to demystify token usage, particularly for vulnerable populations.

5.2. Ensuring Technical Robustness

Given the scale of the pilot, system architecture must be resilient against high-volume stress. Simulated load testing with over 100,000 concurrent users should be conducted. Advanced encryption and blockchain security protocols must be embedded at every transactional node to ensure data integrity and prevent cyber threats.

5.3. Achieving Regulatory Balance

A key tension exists between transparency and privacy. The Bank of Korea should collaborate with the Personal Information Protection Commission to design anonymized transaction options. Additionally, regulatory adjustments must ensure fair competition with private platforms like KakaoPay and NaverPay, while maintaining systemic oversight.

5.4. Empowering Financial Institutions

Rather than displacing commercial banks, Project Han-Gang should position them as CBDC co-innovators. Policy instruments can support the development of token-integrated financial products, such as token savings accounts and programmable deposits. Strategic partnerships between banks and fintech firms should also be facilitated to accelerate cross-sector innovation.

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6. Conclusion

Project Han-Gang serves as a critical inflection point in Korea’s financial modernization journey. It encapsulates both the promise and the complexity of transitioning to a digitally-native monetary system. While the gains in efficiency, inclusion, and transparency are compelling, success hinges on public trust, institutional agility, and thoughtful policy design. Should these conditions be met, Korea is well-positioned to emerge as a global frontrunner in central bank digital currency innovation—transforming not just how money is used, but how financial systems serve society.

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