Shin Hyun-song: “Why do we need stablecoins when we already have the real thing?”… Momentum builds for ‘Project Hangang’

Raised ‘crypto skepticism’ consistently during BIS tenure

Presented on the ‘role of CBDCs’ at a Princeton webinar

“No need to reinvent central bank money”

“Stablecoins resemble 19th-century private money”

CBDC experiments at the BOK seen accelerating after he takes office

It has been confirmed that Shin Hyun-song, nominated as the next governor of the Bank of Korea (BOK), said in 2022 that “everything cryptocurrencies can do can also be done by a central bank digital currency (CBDC).” Shin has consistently voiced a skeptical stance toward cryptocurrencies during his time at the Bank for International Settlements (BIS). Observers say this could add momentum to ‘Project Hangang,’ the BOK’s CBDC experiment.

According to the industry on the 1st, Shin attended the ‘Marcus Academy’ hosted by Princeton University’s Bendheim Center for Finance in June 2022 and said, “From the standpoint of technological capability, whatever cryptocurrencies can do, CBDCs can do just the same.” Marcus Academy is a webinar series founded by Markus Brunnermeier, professor of economics at Princeton 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 underscored the strengths of CBDCs. “Everything rests on the safe foundation of central bank money,” he said, adding, “Because we already have the real thing (central bank money), there is no need to rely on stablecoins to create central bank money anew or to redesign it.”

He continued, “If we have the real thing, why do we need stablecoins?” and added, “We know from hundreds of years of experience 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 as a speculative cycle”

What Shin highlighted was the ‘network effects’ of central bank money. Network effects refer to the phenomenon in which the value and usefulness of a product or service increase exponentially as the number of users grows. “Money is a perfect example of network effects,” he said, adding, “If cryptocurrencies were suitable as money, people would already have converged around a single cryptocurrency.”

He went on to say, “For money, as usage increases, a virtuous cycle is expected in which acceptability also grows,” but added, “(However) the virtuous cycle observed in cryptocurrencies is closer to an outward form created by a speculative cycle, rather than something arising from money’s nature as a kind of coordination device.”

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 value of money is real,” adding, “Cryptocurrencies prove provenance by publicly posting the entire transaction history.”

By contrast, he explained, CBDCs can ensure privacy because the central bank manages transaction histories even when real names are used, while also allowing proof of funds provenance through zero-knowledge proof (ZKP) technology. ZKPs are a technology that mathematically proves asset holdings without disclosing specific data.

“Stablecoins will play only a supplementary role”

Shin also takes a negative view of stablecoins pegged 1-to-1 to fiat currencies. In the BIS annual report published last year, ‘The Next-Generation Monetary and Financial System,’ he offered an assessment to the effect that “stablecoins fall short of serving as the backbone of the monetary system.”

In the report, Shin emphasized that “the future role of stablecoins remains uncertain, but at best they are likely to remain in a supplementary role (to existing money).” He analyzed that “stablecoins resemble private money circulated during the era of U.S. free banking in the 19th century,” adding, “There is an inherent tension between the promise to always guarantee redemption at par and the need for a business model that entails credit and liquidity risks while pursuing profitability.”

He also argued that central banks should lead the digital transformation of the existing monetary system—similar to the BOK’s stance revealed in recent discussions on won-denominated stablecoins. “As the steward of monetary and financial stability, the central bank must lead the transition,” he said, adding that “central bank leadership is essential to fully realize the potential of tokenized systems in a safe, efficient, and inclusive manner.” He continued, “If society detours into private digital money, it may be forced to relearn the historical lesson of the limitations of unsound money that comes with social costs.”

If Shin takes office, the BOK’s CBDC project—provisionally suspended in the second half of last year—is also expected to be fully resumed. 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 inadequate in terms of the stability and settlement finality that money must have,” adding, “The CBDC project may pick up speed, but since Project Hangang is still in the experimental stage, it could take years before it is commercialized.”

Meanwhile, Shin went to work for the first time the previous day (31st) at the office preparing for his confirmation hearing, located in Jung-gu, Seoul. Barring major surprises during the hearing process, Shin is set to be inaugurated as BOK governor on the 21st of this month.