Shin Hyun-song: "If the real thing exists, why do we need stablecoins?"…Momentum builds for 'Project Hangang'

Raised 'crypto skepticism' repeatedly during his BIS years

Presented on the 'role of CBDCs' at a Princeton webinar

"No need to reinvent central bank money"

"Stablecoins are similar to 19th-century private money"

Bank of Korea’s CBDC experiments seen accelerating after inauguration

It has been confirmed that Shin Hyun-song, nominated as the next governor of the Bank of Korea (BOK), said in 2022 to the effect that "anything cryptocurrencies can do, a central bank digital currency (CBDC) can do as well." While at the Bank for International Settlements (BIS), Shin consistently voiced a skeptical view of cryptocurrencies. Observers say this could add momentum to the BOK’s CBDC trial, 'Project Hangang'.

According to the industry on the 1st, Shin attended the 'Markus Academy' hosted by Princeton University’s Bendheim Center for Finance in June 2022 and said, "From a technological capabilities standpoint, whatever cryptocurrencies can do, CBDCs can do in the same way." Markus Academy is a webinar series founded by Markus Brunnermeier, professor of economics at Princeton University and director of the Bendheim Center for Finance. At the time, Shin delivered a lecture titled 'After the Crypto Crash: The Role of Future CBDCs.'

In the lecture, Shin repeatedly emphasized the strengths of CBDCs. He said, "Everything rests on the safe foundation of central bank money," adding, "Because we already have the real thing (central bank money), there is no need to rely on stablecoins to create new central bank money or redesign it."

He continued, "If the real thing exists, why do we need stablecoins?" adding, "Our experience over the past several hundred years shows that commercial banks and non-bank payment service providers can operate very well on the basis of central bank money."

"Crypto’s virtuous cycle is built into a speculative loop"

What drew Shin’s attention is the 'network effect' of central bank money. The network effect refers to a phenomenon in which the value and usefulness of a product or service increase exponentially as the number of users grows. He said, "Money is a perfect example of the network effect," adding, "If cryptocurrencies were a suitable means of money, people would already have converged around a single cryptocurrency."

He added, "For money, a virtuous cycle is expected in which acceptance increases as usage rises," but noted that "the virtuous cycle observed in cryptocurrencies is closer to an outward appearance created by a speculative loop, rather than something stemming from the nature of money as a kind of coordination mechanism."

He also cited privacy protection as a strength of CBDCs. Shin said, "When transactions occur in a digital environment, users want to prove provenance in order to be confident that the money’s value is genuine," adding, "Cryptocurrencies prove provenance by publicly posting the entire transaction history."

By contrast, Shin explained, CBDCs can ensure privacy even when real names are used because the central bank manages transaction histories, and they can also prove the source of funds through zero-knowledge proof (ZKP) technology. Zero-knowledge proofs are a technique that mathematically proves asset ownership without exposing specific data.

"Stablecoins will play only an auxiliary role"

Shin also holds a negative view of stablecoins whose value is pegged 1-to-1 to fiat currencies. In the BIS annual report 'Next-Generation Monetary and Financial System' last year, he offered an assessment to the effect that "stablecoins fall short of serving as the backbone of the monetary system."

In the report, Shin stressed that "the future role of stablecoins remains uncertain, but at best they are likely to be limited to an auxiliary role" (to existing money). He analyzed, "Stablecoins are similar to the private money that circulated during the U.S. Free Banking era of the 19th century," adding, "There is an inherent tension between the promise to always guarantee par convertibility and the credit and liquidity risks that come with it, and the need for a business model that seeks profitability."

He also argued that central banks should lead the digital transition of the existing monetary system. This is similar to the BOK’s stance revealed recently during discussions of a won-denominated stablecoin. He said, "The central bank, as the steward of monetary and financial stability, should lead the transition," adding, "Central bank leadership is essential to fully realizing the potential of tokenized systems in a safe, efficient and inclusive manner." He continued, "If society detours into private digital money, it could end up relearning the historical lesson about the limits of unsound money that comes with social costs."

With Shin’s inauguration, the BOK’s CBDC project, which was temporarily suspended in the second half of last year, is also expected to be restarted in earnest. The BOK plans to push ahead with Phase 2 of Project Hangang in the first half of this year. Shin previously said at the World Congress of Economists held in Seoul in August last year, "I think Project Hangang should continue without interruption."

Hyun Jung-hwan, a professor of international trade at Dongguk University and a former BOK official, said, "(Shin) takes the view that stablecoins are insufficient in terms of the stability and settlement finality that money must have," adding, "The CBDC project could pick up speed, but since Project Hangang is still in an experimental stage, it could take several years before it is commercialized."

Meanwhile, Shin reported to the office preparing for his confirmation hearing in Jung-gu, Seoul, for the first time the previous day (31st). Barring any major surprises during the hearing process, Shin is expected to take office as BOK governor on the 21st of this month.