The Bank of Korea is preparing to launch the second phase of its wholesale central bank digital currency (CBDC) pilot, known as Project Hangang, as early as September 2026, according to a report by Yonhap News. The initiative represents a significant step in South Korea's exploration of digital currency technology, with the central bank aiming to test the commercial viability and expanded functionality of tokenized bank deposits settled on a blockchain-based wholesale CBDC.
Phase 2 of Project Hangang will expand participation from seven banks to nine, adding regional lenders Kyongnam Bank and iM Bank to the existing group of commercial banks. The new phase also introduces several innovative features, including peer-to-peer transfers, biometric authentication, and automated deposit token transfers. Additionally, participating banks will be allowed to bring merchants with which they have existing partnership agreements into the program, thereby broadening the real-world testing environment. A key new component is the testing of government subsidy disbursements using tokenized bank deposits, which could streamline the distribution of welfare and social benefits.
Background of Project Hangang
Project Hangang, named after the Han River that flows through Seoul, is a wholesale CBDC project initiated by the Bank of Korea. Unlike a retail CBDC that would be available to the general public, a wholesale CBDC is restricted to financial institutions for interbank settlements and large-value transactions. In Project Hangang, the central bank issues a wholesale CBDC on a blockchain platform, which then serves as the settlement asset for deposit tokens issued by commercial banks. Consumers can use these bank-issued tokenized deposits for everyday payments, effectively bridging the gap between centralized bank money and decentralized blockchain technology.
The first phase of the pilot was conducted from April to June 2025. It involved seven major banks and focused primarily on building the payment infrastructure necessary for tokenized deposit transactions. The results were promising: approximately 81,000 participants completed 114,880 transactions using deposit tokens during the three-month period. The success of Phase 1 laid the groundwork for the more ambitious second phase, which aims to move beyond infrastructure testing into commercialization and broader application.
New Features and Expanded Scope
The second phase of Project Hangang introduces several enhancements that go beyond the basic payment infrastructure tested in the first phase. Peer-to-peer transfers will allow users to send tokenized deposits directly to one another without the need for a central intermediary, enhancing convenience and potentially reducing costs. Biometric authentication, such as fingerprint or facial recognition, will be integrated to improve security and user experience. Automated deposit token transfers could enable recurring payments, such as monthly subscriptions or salary disbursements, using smart contracts on the blockchain.
One of the most significant new elements is the testing of government subsidy disbursements. By leveraging tokenized bank deposits, the government could distribute subsidies directly to citizens in a more efficient, transparent, and traceable manner. This could reduce fraud, eliminate intermediaries, and ensure that funds are used for their intended purpose. The inclusion of regional banks also reflects a commitment to testing the system in diverse economic environments, not just in the metropolitan Seoul area.
Global Context and Comparisons
South Korea is not alone in exploring CBDCs. Several countries, including China, Sweden, and the Bahamas, have already launched or piloted digital currencies. However, South Korea's approach with Project Hangang is notable for its focus on wholesale CBDC combined with tokenized deposits, a model that aims to preserve the role of commercial banks while leveraging blockchain efficiencies. Other countries, such as the European Central Bank, have explored both wholesale and retail CBDCs, but the tokenized deposit model is a distinctive feature of South Korea's pilot.
The Bank of Korea has been studying CBDCs since 2020, initially conducting research and proof-of-concept tests. The move to a live pilot with real participants and transactions marks a significant progression. The second phase aligns with global trends where central banks are increasingly moving from conceptual research to practical experimentation, particularly in areas such as cross-border payments, securities settlement, and government disbursements.
Technical Underpinnings and Security Considerations
The technical architecture of Project Hangang relies on a blockchain-based wholesale CBDC issued by the Bank of Korea. This wholesale CBDC is used to settle transactions among commercial banks, which then issue their own tokenized deposits to consumers. The blockchain provides immutability, transparency, and programmability, enabling features like automated transfers and condition-based payments. Security is a high priority, with biometric authentication being added in Phase 2 to protect against unauthorized access.
The pilot also tests the scalability of the blockchain infrastructure, as the number of participating banks and merchants grows. Interoperability with existing payment systems is another key consideration, as tokenized deposits must be convertible to traditional bank deposits and vice versa. The Bank of Korea is working closely with the participating banks to address technical challenges such as transaction throughput, latency, and data privacy.
Implications for the Financial Industry
The expansion of Project Hangang could have profound implications for South Korea's financial industry. If successful, the pilot could pave the way for broader adoption of tokenized deposits and wholesale CBDCs, potentially transforming the way payments are made and settled. Commercial banks would need to adapt their operations to accommodate digital currencies, including updating their core banking systems, integrating blockchain interfaces, and training staff. For consumers, the benefits could include faster, cheaper, and more secure transactions, along with new capabilities like programmable money.
The test of government subsidy disbursements is particularly noteworthy, as it could lead to more efficient and transparent public sector financial management. If the pilot proves successful, the South Korean government could expand the use of tokenized deposits to other areas, such as tax refunds, welfare payments, and disaster relief. The inclusion of regional banks also suggests that the pilot aims to benefit underserved areas, promoting financial inclusion.
Challenges and Risks
Despite the promising outlook, Project Hangang faces several challenges. One major concern is the regulatory environment; while South Korea has been proactive in blockchain regulation, the legal framework for CBDCs and tokenized deposits is still evolving. Issues such as data privacy, anti-money laundering (AML), and consumer protection must be addressed. The pilot will need to comply with existing financial regulations while also providing flexibility for innovation.
Another challenge is technological risk. The blockchain infrastructure must be robust enough to handle a large volume of transactions without failures or security breaches. The integration of biometric authentication and automated transfers adds complexity, and any vulnerabilities could undermine confidence in the system. Additionally, the transition from the first phase to the second requires careful coordination among the central bank, commercial banks, and technology providers.
There is also the question of public acceptance. While the first phase had a relatively high participation rate, the second phase will test the system in more diverse scenarios, including government subsidies. Consumers must be willing to adopt tokenized deposits over traditional payment methods, and this may require educational campaigns and incentives.
Looking Ahead
The Bank of Korea has not announced a specific date for the launch of Phase 2 beyond the target of September 2026. The central bank will likely release more details about the technical specifications, participant criteria, and expected outcomes in the coming months. The pilot is expected to run for at least several months, with results potentially influencing the country's long-term digital currency strategy.
The success of Project Hangang could position South Korea as a leader in the adoption of wholesale CBDCs and tokenized deposits. The lessons learned from the pilot will be valuable not only for South Korea but also for other countries exploring similar models. As the world increasingly moves toward digital currencies, the Bank of Korea's methodical and collaborative approach provides a blueprint for how central banks can innovate while maintaining financial stability.
Source:Cointelegraph News