Key Highlights
- South Korea will test deposit tokens for government expenses as an alternative to physical government cards.
- Six banks will participate, with officials making eligible payments by scanning QR codes with smartphones.
- The blockchain-based system will record spending and allow certain restricted purchases to be blocked.
South Korea is set to test blockchain-based deposit tokens for government payments, allowing public officials to make certain work-related purchases through QR codes instead of physical government cards.
According to a local report, the pilot was approved on September 21 and announced on September 22 by the Ministry of Science and ICT as part of the country’s regulatory sandbox program.
The system will allow officials to use smartphones to scan QR codes and pay for eligible expenses, including business promotion costs. Six banks will participate: KB Kookmin, NH NongHyup, Shinhan, Woori, IBK Industrial Bank of Korea and Hana Bank.
The project was one of nine special demonstration cases approved at the ministry’s 45th ICT Regulatory Sandbox Deliberation Committee meeting.
How officials can make payments
Under the pilot, officials would not need to carry a physical government card to make eligible payments. Instead, they can use a smartphone to scan a QR code and pay with a deposit token. The transaction is then recorded through a blockchain-based system.
The deposit tokens are part of Project Hangang, a digital currency payment project being tested by the Bank of Korea with commercial banks. Commercial banks issue the deposit tokens that users spend, while the Bank of Korea’s central bank digital currency, or CBDC, is used when banks settle transactions with one another.
This means the government-payment pilot does not involve officials receiving CBDC directly from the Bank of Korea. The payment instrument is a deposit token issued by a participating commercial bank and linked to bank deposits.
Why the government is testing it
The pilot is also designed to address restrictions around government operating expenses.
Under the National Treasury Management Act, such expenses have generally been handled through government purchase cards or bank transfers. The regulatory sandbox gives the new pilot room to test deposit-token payments under a special exception.
The payment system also comes with built-in controls. Before the tokens are used, certain items or business sectors that are not allowed for government expenses can be blocked. This means an official could be prevented from using the digital payment method for a purchase that falls outside the approved spending rules.
How blockchain tracks the spending
Another part of the system is the way payments are recorded and settled. When a deposit-token payment is made, the transaction is handled through blockchain technology, allowing payment and settlement to take place at the same time. This could also make it easier to check where government money was spent.
The Ministry of Science and ICT expects the system to help small business owners by reducing payment fees and allowing them to receive money immediately after eligible transactions. It also expects the blockchain records to make government spending easier to verify.
Project Hangang is not a retail CBDC
The pilot comes as South Korea continues to debate the wider use of digital currencies.
On September 13, People Power Party leader Jang Dong-hyuk said he opposed introducing a CBDC before legal and institutional safeguards were in place. He raised concerns about whether authorities could track people’s transactions and whether digital money could eventually be used to control how or where funds are spent.
The Bank of Korea’s Project Hangang, however, has a different structure from a retail CBDC system. In the project, consumers use deposit tokens issued by commercial banks, while the central bank’s digital currency is used for settlement between banks.
The first public testing phase also involved users converting money from their bank accounts into deposit tokens through participating banks before spending them at participating merchants.
With the new government-payment pilot, South Korea is now testing whether the same type of digital payment system can work for public spending. The trial puts deposit tokens into another real-world use while the country continues testing how digital money can fit into its financial system.
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