**South Korea’s CBDC Enters Phase 2: From Pilot to Programmable Payments**
The Bank of Korea (BoK) is moving forward with its central bank digital currency (CBDC) initiative, known as Project Hangang, transitioning from a limited pilot to a broader, more functional second phase. After testing deposit token transactions with a small group of banks and users, the BoK is preparing to open the system to nine financial institutions and allow up to 500,000 participants to handle live transactions. This expansion will introduce significant new capabilities and mark a key step toward the potential commercialization of South Korea’s CBDC.
Following a successful first phase that ran from April through June 2025, the BoK reported encouraging, though limited, adoption. The initial deployment involved seven banks and 12,000 merchants, which together facilitated 114,880 transactions across 81,000 digital wallets. However, the data also revealed that only 42% of those who held the wallets actively used them for spending, highlighting a common challenge for digital currency adoption: converting access into usage.
To address this engagement gap, Phase 2 focuses on integrating features that mirror traditional banking and enhance real-world utility. Users will benefit from biometric fingerprint approvals for secure authentication, seamless person-to-person wallet transfers, and automated top-ups that link personal bank accounts to deposit tokens when balances run low. The phase will also introduce recurring automatic payments, the generation of digital cash receipts, and interest payment options on wallet balances.
A particularly novel aspect of this expansion is the inclusion of government subsidy disbursements. For the first time, the BoK will test the distribution of actual public funds using programmable deposit tokens. This allows subsidies to be delivered directly to citizens’ digital wallets with predefined rules for spending, offering greater efficiency and transparency in public finance.
Technically, the BoK operates a wholesale CBDC, which is a blockchain-based digital currency used for settlement between financial institutions. Commercial banks then issue deposit tokens, representing a digital form of the Korean won held in bank accounts, which the public can use for everyday transactions. BoK officials have described this hybrid model as a “middle ground between a CBDC and a stablecoin,” balancing innovation with financial stability.
The expanded pilot is designed to test the viability of reducing transaction costs for merchants compared to traditional card networks, which often charge significant interchange fees. For government agencies, the programmable nature of these tokens opens the door to more controlled and traceable subsidy programs, replacing paper-heavy processes with automated, auditable transactions.
Phase 2 will involve two new banks—Gyeongnam Bank and iM Bank—bringing the total number of participating institutions to nine. The pilot will operate on an open-ended timeline without a fixed end date, allowing for extended testing and adjustments based on real-world feedback. With the launch of Project Hangang, South Korea’s new central bank governor, Shin Hyun-song, has placed the CBDC project at the forefront of the country’s financial innovation strategy.
Looking ahead, South Korea is also witnessing increased activity from the private sector in the digital asset space, with major banks exploring stablecoin technologies and the government updating regulations to classify cryptocurrencies as national assets. However, the programmable nature of CBDCs remains a double-edged sword. While it offers precision and efficiency for policy goals, it also raises concerns about surveillance, control, and the potential for mission creep beyond the original intent. As the world watches South Korea’s next steps, the balance between innovation and privacy will be closely scrutinized.
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### FAQ
**What is a CBDC?**
A Central Bank Digital Currency (CBDC) is a digital form of a country’s fiat currency, issued and regulated by the central bank. Unlike cryptocurrencies, a CBDC is a direct liability of the central bank and functions as a digital version of cash.
**What is Project Hangang?**
Project Hangang is the Bank of Korea’s initiative to develop and implement a CBDC, named after the Korean name for the Hangang River. It aims to modernize payment systems and explore the use of digital currency for both retail and government applications.
**What changed from Phase 1 to Phase 2?**
Phase 1 was a small-scale test with seven banks and 12,000 merchants. Phase 2 expands to nine banks and up to 500,000 users. It also introduces advanced features like biometric payments, person-to-person transfers, auto-top-ups, and crucially, the ability for government agencies to disburse real subsidies using programmable tokens.
**How are deposit tokens different from a CBDC?**
The BoK issues a wholesale CBDC for use between financial institutions. Commercial banks then create deposit tokens, which are blockchain-based representations of the Korean won in your bank account. These deposit tokens are what the public will use for payments, acting as a digital equivalent of cash in your wallet.
**Why is the government testing subsidies on the CBDC?**
The goal is to test a more efficient and transparent way to distribute public funds. Programmable tokens can be loaded with specific rules, ensuring that money is spent only for its intended purpose (e.g., food, transportation) and reducing fraud or administrative overhead.
**Will my CBDC transaction be private?**
Unlike cash, every transaction on a CBDC ledger is recorded. While this enhances security and prevents fraud, it also means transactions are traceable. This has led to concerns from privacy advocates about potential government surveillance or control over spending.
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### Conclusion
South Korea’s move to expand its CBDC pilot represents a significant milestone in the global adoption of central bank digital currencies. By shifting from a closed testing environment to a large-scale, feature-rich pilot, the Bank of Korea is actively addressing one of the biggest hurdles for digital currencies: making them as convenient and useful as traditional payment methods. The integration of programmable subsidies could offer a new model for government welfare distribution, but it also underscores the inherent tension between efficiency and financial privacy. As the world’s major economies explore similar paths, South Korea’s experiment will serve as a crucial case study in balancing technological innovation with the protection of individual freedoms. The coming months will determine whether this “middle ground” CBDC can successfully integrate into the financial fabric of daily life.
