Digital Currency in Trade Payments? - The Hidden Risks Behind the Hype

Introduction

South Korea is cautiously exploring the adoption of a central bank digital currency (CBDC). Since late 2023, the Bank of Korea has been conducting pilot tests in collaboration with the Bank for International Settlements (BIS) to develop CBDC technology. With the first stage completed, the central bank plans to move forward with a second pilot involving commercial banks and refine the design of its digital currency in line with the new government’s policy direction. Rather than rushing implementation, Korea seems to be taking a step-by-step approach to ensure safety and effectiveness in the transition to digital payments.

In parallel, the government has announced plans to introduce stablecoins as an official means of cross-border trade settlement. As part of the recently unveiled “2026 Economic Growth Strategy,” the administration aims to revise foreign exchange regulations to allow companies to use stablecoins pegged to the Korean won for international transactions. The plan intends to lift strict rules that previously blocked overseas remittances via crypto, enabling 24/7, low-cost digital asset transfers. However, to ensure stability, algorithm-based coins will be excluded, and only institutions with 100% asset-backed reserves (such as bank deposits) will be allowed to issue these stablecoins. This regulatory framework shows Korea’s attempt to strike a balance between innovation and risk management.

In Asia, China is leading the way with its digital yuan (e-CNY), paving a new path for trade settlements. The People’s Bank of China (PBoC) has launched the world’s largest CBDC pilot, reportedly processing over 3.4 billion transactions worth 16.7 trillion yuan (approximately $2.4 trillion). Through the multi-national CBDC project mBridge—with participants including Hong Kong, Thailand, the UAE, and Saudi Arabia—China has processed more than 4,000 cross-border transactions totaling $55.5 billion since 2022, with about 95% of them settled in digital yuan. This suggests a strategic move to create an alternative to the dollar-dominated global payment system.

Rather than directly challenging SWIFT or the dollar, China appears to be building a parallel payment network to gradually reduce reliance on U.S. currency. The mBridge platform is already being used to settle transactions in energy and commodities where China has influence, accelerating the internationalization of the yuan through digital infrastructure.

The Hidden Risks of Digital Currency in Trade

While digital currencies promise greater efficiency and convenience, their application in trade payments comes with several serious risks.

First, there are significant concerns around privacy and surveillance. CBDCs, by design, allow central banks to track transactions in real time. In China’s case, the digital yuan has raised alarms that the government could monitor spending habits and restrict how money is used—essentially turning it into a tool for domestic surveillance. In international trade, using another country’s CBDC means that country may gain full access to transaction data, risking corporate confidentiality and economic espionage.

Second, there’s a risk of financial instability. Even stablecoins, which are meant to maintain a fixed value, can collapse if trust erodes. A case in point: the 2022 Terra/Luna crash, which wiped out billions of dollars. The BIS has warned that unchecked stablecoin proliferation could threaten financial stability and undermine monetary sovereignty. Furthermore, if CBDCs significantly replace cash or bank deposits, they could accelerate deposit outflows from commercial banks, potentially causing liquidity shortages and broader instability in the financial system.

Third, regulatory gaps and legal uncertainty remain major concerns. Cross-border digital currency transfers often fall into legal gray areas. With differing rules across countries, a lack of harmonized regulation opens the door to illicit uses such as money laundering or tax evasion. Some sanctioned states and criminal groups are already suspected of using cryptocurrencies to bypass international financial restrictions. Korea’s own push to revise its foreign exchange laws stems from the need to build a legal framework that keeps pace with emerging payment technologies.

Lastly, there’s the possibility of intensified geopolitical conflict. As countries compete over digital currency standards, monetary power struggles may emerge. China’s digital yuan is seen as a challenge to the U.S. dollar’s dominance—particularly its use as a sanctioning tool. If countries begin pressuring trade partners to adopt their own CBDCs, or if incompatibilities between digital systems arise, friction in global commerce could increase.

Conclusion

CBDCs and crypto-assets offer exciting opportunities for modernizing trade payments, but they also introduce new and often unpredictable risks. Korea, while actively exploring these technologies, must remain vigilant in addressing privacy, financial stability, regulatory reform, and international cooperation. Rather than pursuing innovation at all costs, a cautious and well-regulated approach is key.

Ultimately, Korea must develop a balanced strategy that embraces the benefits of digital currency while safeguarding economic security. Policymakers should draw lessons from international cases and work toward global standards that ensure digital payments are not only fast and efficient—but also safe and trusted. In this evolving financial landscape, the pace of innovation matters, but its direction and safeguards matter even more.