Bank of Korea Outlines Future Path for Payment Systems and CBDC Development

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The Central Bank of Korea (BOK) has recently released its 2022 Payment and Settlement Systems Report, highlighting the successful oversight of the systems and its preparations for a future with Central Bank Digital Currency (CBDC). The report also emphasised discussions on stablecoin regulation.

The BOK is actively exploring the possibility of introducing a CBDC, conducting investigations into intelligent contracts, offline payments using near-field communications, and cross-border payment mechanisms. To test its simulated CBDC system, the bank connected 14 banks and the Korea Financial Telecommunications and Clearings Institute (KFTCI) for verification in the year's second half.

In its efforts to enhance payment systems, the BOK-Wire+ fast payment system will undergo an upgrade to real-time gross settlement (RTGS). It will adopt the ISO 20022 standard, which is expected to be implemented by 2028. Additionally, the BOK will increase supervision of ‘Big Tech’ payment services and strengthen its response capabilities to IT operational risks.

Despite processing an impressive 2,000 transactions per second, the CBDC system faced slowdowns at full capacity, prompting the need for further improvements. The BOK experimented with a zero-knowledge proof protocol to enhance transaction privacy, successfully hiding wallet addresses and payment amounts. 

However, this led to notable processing speed reductions, and the security implications of zkCBDC remain under investigation. The bank is also considering homomorphic encryption as an alternative approach.

With a commitment to further CBDC research, the BOK plans to explore CBDC-based tokenised deposits and expand collaborative research with the banks and KFTCI. The main focus of the research is to identify a CBDC operating model that minimises adverse effects on financial system stability and monetary policy effectiveness.

While South Korea has made concrete progress in crypto regulation by introducing the Framework Act on Digital Assets, the regulatory framework still needs to be completed, preventing the allowance of crypto payments. The BOK actively discusses stablecoins, seeking to establish a comprehensive and robust regulatory approach.

Notably, South Korea's Shinhan Bank has completed its second stablecoin remittance pilot project with the involvement of Siam Commercial Bank's SCB TechX unit and an unnamed Taiwanese financial institution. The project utilised the Hedera network for real-time settlement and foreign exchange integration with the banks' national currencies. 

As the BOK charts out the future course of payment systems and CBDC, it aims to balance embracing technological advancements and safeguarding the financial system's stability. With ongoing research and engagement, the central bank is committed to establishing a well-rounded and secure approach to digital currencies and payment systems in South Korea.

Shashank is the founder of yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash