The Bank of Korea has recently released its 2022 Payment and Settlement Systems Report, emphasizing successful oversight of existing systems while laying the groundwork for central bank digital currency (CBDC) and discussing comprehensive stablecoin regulations. With a proactive approach towards CBDC exploration, the South Korean central bank has conducted cross-border remittance tests that interlinked multiple CBDCs.
Prioritising compliance over privacy, the bank established a virtual anti-money laundering and counter-terrorism financing mechanism to gather transaction data, ensuring the system’s integrity.
The report highlights the forthcoming upgrade of the BOK-Wire+ fast payment system to a real-time gross settlement (RTGS) platform, adopting the ISO 20022 standard set to be implemented in 2028. Additionally, the bank aims to bolster its supervision of Big Tech payment services and enhance capabilities to address IT operational risks effectively.
Preparations for the potential introduction of a CBDC have been actively pursued, encompassing research into smart contracts, offline payments using near-field communications, and cross-border transactions. To verify the simulated CBDC system’s functionality, the bank connected 14 banks and the Korea Financial Telecommunications and Clearings Institute in the second half of the year, successfully handling 2,000 transactions per second. However, the system faced slowdowns as it reached its capacity, necessitating further improvements.
In an effort to enhance transaction privacy, the BOK experimented with a zero-knowledge proof protocol for clearing CBDC transactions, concealing wallet addresses and payment amounts. However, this approach markedly reduced processing speed, prompting the need to explore alternative solutions, such as homomorphic encryption.
Looking ahead, the Bank of Korea will intensify CBDC research, with a particular focus on CBDC-based tokenized deposits. Collaboration with banks and the clearings institute will be expanded to ensure the CBDC operating model minimizes adverse impacts on financial system stability and the effectiveness of monetary policy.
In the realm of crypto asset regulation, South Korea has made concrete progress with the introduction of the Framework Act on Digital Assets Act. However, the regulatory framework remains incomplete, precluding the use of cryptocurrencies for payments. The central bank is actively engaged in discussions concerning stablecoin regulations, reflecting the country’s commitment to a comprehensive approach.
Excitingly, Samsung, the renowned electronics giant, has entered into a strategic partnership with the South Korean central bank to explore the potential of an offline central bank digital currency (CBDC). The memorandum of understanding (MoU) solidifies their joint commitment to advancing CBDC research, focusing on testing offline wire transfers and payments using Samsung Galaxy devices.
This collaboration holds immense promise in streamlining cross-border settlements and revolutionizing the nation’s financial landscape. Leveraging the secure element security chip embedded in Galaxy smartphones and watches, these devices can provide enhanced payment security and reliability, offering a robust platform for seamless offline transactions.
As South Korea continues to pave the way for a digital currency future, the nation’s central bank and tech industry giants forge ahead in embracing innovative solutions and regulations, marking an exciting chapter in the evolution of the financial ecosystem.
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