Bank of Korea Launches Phase 2 of Digital Won Pilot with Real Government Subsidies

The Bank of Korea (BOK) has officially launched Phase 2 of its Project Hangang, enhancing its digital won pilot program to include nine banks and enabling the use of Central Bank Digital Currency (CBDC) for real government subsidies. This initiative marks a significant advancement in South Korea's efforts to implement a blockchain-based payment infrastructure.

Key Takeaways

Expanded Participation: Project Hangang Phase 2 now involves nine banks, including new additions Kyongnam Bank and iM Bank.
Real Subsidy Payments: This phase introduces government subsidy disbursement through CBDC-linked systems, enhancing financial efficiency and reducing administrative costs.
Improved Usability Features: New functionalities include biometric authentication, peer-to-peer transfers, and automatic fund top-ups to enhance user experience.
Future Goals: Large-scale transactions with all nine banks are expected in the latter half of 2026, aimed at lowering payment fees for small businesses and integrating advanced financial solutions.

Bank of Korea digital won pilot with banks

Overview of Project Hangang Phase 2

The Bank of Korea has kicked off the second phase of Project Hangang as of Wednesday. This key initiative aims to create a blockchain-based payments and settlement system using wholesale Central Bank Digital Currency (CBDC) in collaboration with commercial bank deposit tokens. The expanded pilot program now includes nine participating banks, increasing from the original seven, and for the first time, it integrates live government subsidy payments.

Participants and Collaborations

In the latest phase, Kyongnam Bank and iM Bank have joined the original seven banks, which consist of KB Kookmin, Shinhan, Woori, Hana, NH Nonghyup, IBK Industrial, and BNK Busan Bank. The project is being executed in partnership with the Financial Services Commission and the Financial Supervisory Service. It includes practical testing of deposit tokens for two main applications: distributing government subsidies and facilitating consumer payment and transfer services across the nation.

Lessons from Phase 1

The first phase of Project Hangang, which lasted about three months starting in April 2025, involved 100,000 participants and yielded 118,000 payment test transactions. This phase confirmed that a deposit-token-based payment and settlement framework could function stably in real-life conditions. However, it also highlighted some challenges: of the 100,000 invited participants, only about 80,000 opened digital wallets, leading to a modest payment total of 692.46 million won. These figures caused banks to express concerns about the project’s commercial viability, especially since they collectively invested around 30–35 billion won in the infrastructure.

Enhancements in Phase 2

To address the issues noted in Phase 1, the Bank of Korea has implemented several enhancements in Phase 2. New features include:

Biometric Authentication: Payments can now be approved using fingerprint recognition.
Peer-to-Peer Transfers: Users can directly transfer funds between digital wallets.
Automatic Fund Top-Up: This function automatically converts funds from a connected bank account into deposit tokens when the wallet balance is low.

The BOK considers these improvements essential steps towards making the digital payment system as user-friendly as existing electronic systems.

Government Subsidy Integration

A notable new feature in this phase is the ability to distribute government subsidies. The South Korean government allocates significant resources through its social welfare programs. A representative from the BOK indicated that the aim of Project Hangang is to improve fiscal efficiency by minimizing misuse and lowering administrative costs linked with traditional methods like credit cards and vouchers. The government is assessing the possibility of distributing a portion of its $499 billion budget through CBDC-linked systems, making this subsidy pilot crucial for broader implications in the digital payment landscape.

Project Ambitions and Future Directions

The BOK has described its ambitions for the project in modest terms, stating that the digital currency being tested is "an intermediate stage between a CBDC and stablecoins." They emphasized that Project Hangang is not necessarily aimed at the immediate launch of a full retail CBDC, but rather serves as a practical test of public financial infrastructure functioning in a digital context. For commercial banks, it represents a chance to prepare for potential future institutionalization.

Looking ahead, large-scale real transactions with all nine banks are anticipated in the second half of 2026, aiming to reduce payment fees for small businesses and connect financial frameworks to new industries, including AI-driven automatic payments. LG CNS, responsible for developing the technical infrastructure for Phase 1, continues to be a vital partner for this project.

The launch of this phase follows a recent BOK report urging regulators to limit early stablecoin issuance backed by the won to licensed commercial banks, citing concerns about money laundering and financial stability. This highlights Seoul's preference for a controlled, bank-centric approach to digital currency adoption rather than an open-access model seen in other regions.