South Korean central bank outlines future of payment system, CBDC

The South Korean central bank (BOK) has published its 2022 Payment and Settlement Systems Report. As reported, the system was successfully inspected SaidAnd it is preparing for the future with central bank digital currencies (CBDCs) and broadly discussing stablecoin regulation.

The BOK-Wire+ fast payment system will be upgraded to Real-Time Gross Settlement (RTGS) and adopt the ISO 20022 standard, which is expected to come into force in 2028, the report said. The bank will also increase oversight of “Big Tech” payment services and build its capabilities to respond to “IT operational risks.”

The BoK continues its preparations for the possible introduction of a CBDC, including the use of smart contracts, offline payments with near-field communication, and investigations into cross-border payments. The bank connected 14 banks and the Korea Financial Telecommunications and Clearings Institute (KFTCI) to its simulated CBDC system for the second half of the year to verify its functionality.

“In line with these international trends, future Korean regulations for cryptocurrencies may also include a separate set of regulations for stable coins.

More stringent rules should be applied to stable coin issuers and related service providers with respect to entry rules, such as… pic.twitter.com/czbhJAvqaY

— Joshua Rosenberg (@_jrosberg) 19 July 2023

The system handled 2,000 transactions per second. This figure is higher than most domestic payment systems, but it has been slow to reach capacity, so further improvements are needed, the report said.

The bank attempted to use a zero-knowledge proof protocol to clear CBDC transactions to improve their privacy. This allowed it to hide wallet addresses and transaction payment amounts, but it significantly slowed processing speeds and the security implications of zkCBDC were not investigated. It said it may also consider homomorphic encryption.

Related: CBDCs Should Protect Privacy, Not Be Surveillance Tools: Former CFTC Chair

BoK will further the CBDC research, with plans to look into CBDC-based token deposits and expand the scope of the research with banks and KFTCI. It said:

“A key focus of the BOK’s research will be to identify a CBDC operating model with minimal adverse effects on the stability of the financial system and the effectiveness of monetary policy.”

The report noted “concrete” progress towards crypto asset regulation in the country with the introduction of the Framework Act on Digital Assets Act, but the regulatory framework to allow payments in cryptocurrencies is still incomplete. It has been repeatedly stated that the bank is also engaged in discussions about a stablecoin.

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