Italy and South Korea's Central Banks Forge a Path in CBDC Development

The Bank of Italy and the Bank of Korea have recently formalized their collaboration through a Memorandum of Understanding (MOU) signed on December 5, 2023. This partnership marks a pivotal moment in the exploration and potential implementation of digital currencies by central banks, reflecting a growing global interest in the digitization of national currencies.

The essence of this MOU lies in mutual knowledge-sharing, specifically focusing on Information and Communication Technology (ICT) as it supports real-time settlement systems and CBDCs. This cooperative venture is not the first of its kind between these two banks. Previously, they have engaged in joint efforts, such as the collaboration with the Monetary Authority of Singapore and the International Monetary Fund on a paper discussing purpose-bound money (PBM). PBM, an innovative concept in the realm of digital currencies, enables money to be earmarked for specific uses, ensuring its utilization aligns with predetermined objectives.

In parallel, the Bank of Korea has been actively engaged in the CBDC space, with notable steps taken in October, when it announced a trial of a wholesale CBDC in collaboration with the Bank of International Settlements. This initiative aims to evaluate the feasibility of using wholesale CBDCs as settlement assets for tokenized bank deposits. The pilot program is designed to explore various CBDC design models and does not necessarily indicate an imminent full-scale implementation in Korea.

On Italy's end, the Bank of Italy has been proactively exploring the potential impacts of a CBDC on the economy. In a paper published in July, the bank examined the implications of a CBDC on residents' choices in a small open economy, with a particular focus on the banking system and economic activity. This research forms part of Italy’s broader initiative to aid financial institutions in understanding and experimenting with tokenized assets, including partnerships with entities like Polygon Labs and Fireblocks.

In conclusion, the MOU between Italy and South Korea's central banks is more than a bilateral agreement; it's a reflection of a global shift towards a digitized financial future. As these and other countries delve deeper into the world of digital currencies, the financial landscape is poised for significant transformation.