The Korean central bank is developing a blockchain platform for government bonds, Yonhap news reports. Many other blockchain bond solutions focus on the issuance process. But in this case, the objective is to test real-time settlement or delivery versus payment.
To achieve this, the records for the Korea Securities Depository uses a distributed ledger. This enables the transfer of ownership title to happen simultaneously with payment. Nodes are hosted by the central bank, the KFTC (responsible for Korea’s payment network) and other financial institutions.
However, apart from registering ownership of the bonds, the payment leg implies cash on the ledger. So the question is whether the Bank of Korea is enabling a wholesale central bank digital currency (CBDC) or the cash is private money.
We’ve reached out to the Bank of Korea but didn’t get a response in time for publication. The central bank has previously said it has no plans for a CBDC, but that may have referred to a general-purpose currency. The bank previously explored the impact of a CBDC on financial stability.
The threat to financial stability is when the CBDC is an interest-bearing central bank account which competes with commercial banks. As a result, commercial banks have fewer deposits, so they will be able to lend less, which raises the nominal interest rate.
The net effect is there’s too little lending, so in order to try to increase the money supply, the central bank mandated reserve-deposit ratio would be lowered. Given banks have fewer reserves, there’s a higher risk of them running out of cash. This increases the probability of bank runs and negatively impacts financial stability.
On the one hand, delivery versus payment seems appealing. It reduces the risk that someone defaults on payment. But for those that trade frequently, it sometimes requires more cash at a single point in time, because many existing settlement systems net off amounts that are due against expected receipts.
Last year LG CNS was chosen as a Bank of Korea technology partner.
“CBA now has tangible evidence… that blockchain technology can deliver a new level of efficiency, transparency and risk management capability versus the existing market infrastructure,” said Sophie Gilder, Head of Blockchain & AI, Commonwealth Bank of Australia. She added that CBA intends to bring about additional functionality to bond-i in future.
The platform uses a private version of the Ethereum blockchain.
The announcement also references the World Bank’s blockchain bond, the bond-i, a $108 million bond issued with help from the Commonwealth Bank of Australia. The solution used a private Ethereum blockchain to create, transfer and manage the bond through its life cycle.
The corporate bond market is attracting a lot of blockchain attention. In Japan, Nomura and Nomura Research have launched BOOSTRY to tokenize corporate bonds. MUFG launched the Security Token Research Consortium in conjunction with numerous major Japanese enterprises to explore using digital cash for settlement.
The Thailand Bond Market Association has plans to adopt the technology. Societe Generale and Santander have both used the public Ethereum blockchain in a very controlled fashion. And Spanish bank BBVA has conducted transactions with several different types of debt.