Banca d'Italia, Italy's central bank, and the Bank of Korea announced Tuesday that they had established a memorandum of understanding to collaborate on developments of Central Bank Digital Currencies or CBDCs.
According to the press release from the Bank of Italy, the MoU will allow the two banks to exchange knowledge and expertise in information and communication technology (ICT) for real-time payment and settlement systems and CBDCs.
The press release also revealed that the Bank of Italy's general manager, Luigi Federico Signorini, attended the meeting and signed the agreement.
This isn't the first time the two central banks have joined forces on CBDCs.
Previously, they partnered with the Monetary Authority of Singapore and the International Monetary Fund to collaborate on a paper about purpose-bound money (PBM), which enables money to be programmed for specific uses. They ensured that PBM will not replace digital money "as a medium of exchange."
✒️ The Bank of Italy and the Bank Of Korea @bok_hub signed a memorandum of understanding aimed at strengthening collaboration on #IT #InformationTechnology and #PaymentSystems
— Ufficio Stampa della Banca d'Italia (@UfficioStampaBI) December 5, 2023
✔️ The MoU provides for the mutual sharing of knowledge and information on the topics of #ICT… pic.twitter.com/vAWsLRerVI
Differing approach
The Bank of Italy and the Bank of Korea (BOK) have distinct approaches in their respective countries when developing CBDCs.
The Bank of Italy has opted to focus on interoperability solutions for settling distributed ledger technology (DLT)-based transactions through hash-linked contracts. This approach is part of a wider trial with other European countries under the European Central Bank (ECB).
Europe is currently exploring various DLT-based security settlement options for CBDCs, including the wholesale CBDC approach adopted by the Banque de France and the trigger solution pursued by Germany.
It bears mentioning, however, that this doesn't mean the Italian central bank is not exploring the wholesale CBDC approach. The Bank of Italy has established a DLT sandbox environment where the Italian banking association, Associazione Bancaria Italiana (ABI), is exploring the use of a wholesale CBDC for interbank settlement. ABI has already developed a novel DLT solution for daily interbank reconciliations.
It also partnered with Polygon Labs and Fireblocks in July to launch an initiative to assist financial institutions in exploring tokenized assets. This project will provide institutions with a controlled environment to experiment with security tokens through DeFi transactions.
South Korea has taken a more direct approach by piloting its CBDC infrastructure technology since October 2023. This pilot involves both private banks and public institutions, with the Bank for International Settlements (BIS) providing technical support. It aimed to evaluate the practicality of employing wholesale CBDCs as settlement assets for tokenized bank deposits, as well as uncover potentially viable CBDC design models.
The BOK plans to invite 100,000 citizens to participate in its CBDC pilot program, scheduled to commence in September-October 2024. The trial will allow individuals to test the functionality of the CBDC by making purchases and deposits using the digital currency.
"The pilot project will be conducted first in the fourth quarter of 2024," a statement from the BOK read.
"The possibility of conducting separate pilots will be considered as well if banks propose new individual projects."
Worldwide CBDC development
The two banks are among multiple central banks worldwide working on rolling out their CBDCs. They are actively pursuing the development of CBDCs to streamline cross-border payments and challenge the dominance of private cryptocurrencies. The initiative aims to connect different continents and regions seamlessly, reducing friction and costs for consumers.
The central banks are also researching the privacy implications of CBDC implementation. To address this issue, some governments support a model granting private corporations increased authority while safeguarding user data.
The BIS recently released a report on Project Tourbillon, a research initiative aimed at bolstering privacy in CBDC transactions through technological integrations. The project developed two models, eCash 1.0 and eCash 2.0. Both models are designed to uphold stringent privacy standards without compromising security or scalability, even during peak transaction periods across different countries.