Bank of Korea: Central Bank Cryptocurrencies Pose 'Moral Hazard'

South Korea's central bank has announced that it does not plan to launch its own digital currency over fears it could destabilize the economy.

According to The Korea Times on Monday, the BoK said that issuing a central bank digital currency (CBDC) could pose a "moral hazard" by adversely affecting monetary policy and its implementation, and possibly causing instability in the market as it effectively doesn't function like fiat money.

More than that, the Bank of Korea (BoK) went as far as to say that "digital currencies do not perform as money," in a new report.

While the central bank set out to examine the feasibility of using digital currencies as currency, "our thoughts are that digital currencies have been exposed to various categories of risk associated with credit, liquidity and legal management," said Kwon Oh-ik, a BoK economist, in the report.

Looking more widely, the unrestricted issuance of both traditional and digital currencies could bring "social costs and undermine social welfare," the paper warns, adding:

"It's desirable that the BoK is the only entity to entirely control the issuing of money."

The central bank isn't entirely negative on CBDCs, however, saying that they could "revolutionize" the banking system. Even so, they would need to be rigorously tested before being approved.

The paper also recommends the regulation of private issuance of digital currencies, according to Yonhap, adding that the government should impose a tax on issuers to make them less likely to exaggerate the value of their holdings.

"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," Kwon said.

The central bank has been studying the possibility of a CBDC and how cryptocurrencies might influence the financial sector since January, when it set up a task-force to research the technology.

Korean won image via Shutterstock