Bank of Korea Says CBDCs Pose A ‘Moral Hazard’

Bank of Korea

The Korea Times said in a report on Monday that the Bank of Korea, the country’s central bank, does not plan on launching a virtual currency. The bank came to this decision over fears it could destabilize the economy.

The BoK said that issuing a central bank digital currency (CBDC) could pose a “moral hazard” by negatively impacting monetary policy and its implementation. The bank also thinks that issuing a CBD can cause market instability since CBDCs don’t function like fiat currencies.

Even more, a researcher from the BoK said that “Digital currencies don’t perform as money.”

Kwon Oh-Ik, an economist from the BOK’s economic research institute, said that while the bank rigorously reviewed the feasibility of digital currencies, they think the market exposes digital currencies to various risks associated with credit, liquidity and legal management.

Taking a broad view of the issue, the BoK thinks that the unrestricted issuance of both traditional and digital currencies could bring social costs and undermine social welfare. BoK researchers believe that the bank should be the only entity in the country controlling the issuing of money.

The country’s central bank, however, isn’t entirely negative on CBDCs. The bank says CBDCs could revolutionize the banking system. The bank’s researchers recommend that CBDCs undergo rigorous testing before being approved.

The central bank also recommends regulation of the private issuance of digital currencies. A report from Yonhap adds that the government should begin imposing a tax on issuers of digital currencies. The bank believes this will make them less likely to overvalue their holdings.

Kwon continues in this vein, saying:

“Technology improvements don’t mean private sectors will be allowed to have the rights for money issuance. If this happens, the BoK should regulate them but properly.”

The BoK has been studying the possibility of issuing a CBDC and also how the release of a digital currency will influence South Korea’s financial sector since January.

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