South Korea sees its financial future with CBDC and comprehensive crypto regulations.
The Bank of Korea (BOK) has disclosed its achievements and future prospects for the nation's payment systems, including plans to adopt a central bank digital currency (CBDC) and lay down regulations for stablecoins.
According to the recently released 2022 Payment and Settlement Systems Report, BOK's fast payment system, BOK-Wire+, is set for an upgrade to a real-time gross settlement (RTGS) system and the adoption of the ISO 20022 standard by 2028.
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The BOK will also be boosting its scrutiny of Big Tech payment services and enhancing its capabilities to address IT operational risks.
Paving the way for a CBDC, the BOK has been studying the utilization of smart contracts, offline payments facilitated by near-field communications, and cross-border transactions. To test functionality, the bank integrated its CBDC simulation system with 14 banks and the Korea Financial Telecommunications and Clearings Institute.
The simulated CBDC system managed 2,000 transactions per second, a superior figure compared to most domestic payment systems. However, the report also highlighted that the system slowed down when operating at full capacity, implying that further enhancements are required.
To boost transaction privacy, the BOK experimented with a zero-knowledge proof protocol for CBDC transactions. This mechanism enabled to hide wallet addresses and transaction amounts at a cost to processing speed.
The bank admitted the security implications of this approach remain unexplored and is considering the possibility of homomorphic encryption.
As per the report, the BOK plans to ramp up CBDC research, exploring CBDC tokenized deposits and extending research collaboration with banks and the clearings institute. In the report, the bank noted:
A key focus of the BOK’s research will be identifying a CBDC operating model with minimally adverse impacts on the stability of the financial system and on the effectiveness of monetary policy.
The bank's report also highlighted significant advancements in cryptocurrency regulation, marked by the Framework Act on Digital Assets Act introduction. However, the BOK maintained that the regulatory framework remains insufficiently developed to permit cryptocurrency payments. On top of that, the bank confirmed its continued engagement in discussions about stablecoin regulations.
South Korea's Central Bank is charting a forward-looking course for its payment systems and potential adoption of a CBDC, reflecting the country's push towards digital transformation in the financial sector.
