Certificate of deposit (CD) tokens are generating interest among South Korean banks as a potential replacement for stablecoins amid concerns about their stability.

According to industry sources on Sunday, Hana Bank plans to conduct research on CD tokens as part of its internal decision to engage in the proof of concept (PoC) process for the central bank digital currency (CBDC) project by the Bank of Korea.

PoC refers to the verification of new technologies before their introduction to the market. While no solid plan is available yet until the ongoing discussions on the CBDC system are complete, Hana Bank’s move is believed to show its interest in the central bank’s blockchain-based monetary system.

Other commercial banks have also shown interest, with Woori Bank recently releasing a report related to CD tokens through its research body.

The growing interest in CD tokens comes from their potential as an alternative to stablecoins. CD tokens are bank deposits made into tokens based on blockchain technology. Payments currently settled with funds from bank accounts will be replaced with these tokens if they are in use.

CD tokens emerged in particular after the Silicon Valley Bank (SVB) collapse in March.

Following the announcement by Circle Internet Financial LLC, the operator of the world’s second-largest stablecoin USDC, that it had deposited $3.3 billion, which was approximately 8 percent of the $40 billion reserve assets, with SVB, the price of USDC dropped to an all-time low of $0.88 due to a large-scale sell-off by USDC holders.

This raised concerns about the reliability of stablecoins, which have been reportedly known for their value being pegged and backed one-to-one by reference assets. For example, USDC and Tether are pegged at $1 nominally, but they are not always exchanged at a 1:1 ratio.

On the other hand, CD tokens are based on the existing banking system, and transactions using CD tokens are settled with CBDCs issued by central banks, allowing more reliability compared to stablecoins.

Even with the application of blockchain technologies, the current banking system with central banks working as clearinghouses does not need to be changed except for notes or deposits at banks being replaced with CD tokens, and only settlements being made with CBDCs.

Another distinctive feature of CD tokens is the requirement for identity verification since they are issued based on bank deposits. While stablecoins are not traceable once issued by the issuer, CD tokens enable identification verification as transactions are linked to deposit accounts.

“CD tokens are perceived as stable from the banks’ perspective since they do not differ significantly from the current system,” said one senior banker.

By Choi Keun-do and Chang Iou-chung

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