South Korea’s Digital Currency Ambitions: Analyzing the Shift to Central Bank Digital Currency and the Underlying Risks

The South Korean central bank, widely known as BOK, has recently unveiled its future plans for upgrading payment systems, hinting clearly at the advent of Central Bank Digital Currency (CBDC). While existing systems effectively oversaw payment settlements, the bank intends to foster innovation offering faster transactions, extensive financial technology applications and broader stablecoin regulations.

One of the innovations on the horizon is a shift from the BOK-Wire+ fast payment system to real-time gross settlement (RTGS). This move is backed by the ISO 20022 standard projected to implement around 2028. This technology leap aims to enhance the real-time transfer capabilities, thereby adding a new dimension to the banking sector.

However, such digital transformations accompanied by increasing interests in ‘Big Tech’ payment services also bring about IT operational risks. Recognizing the potential vulnerabilities, BOK plans to strengthen its oversight, mitigating the threats to ensure secure transactions.

Coming to the CBDC, preparatory steps are on full swing, exploring the fruitful possibilities of smart contracts and offline payments using near-field communications (NFC). Additionally, cross-border payments are also under the lens. A key focus is given to a CBDC operating model that could amplify monetary policy’s efficacy without destabilizing the financial system noticeably.

While proclaiming such promising innovations, it’s worth noting that the system could handle 2,000 transactions per second, outpacing most domestic payment systems. But it experienced a slow down when nearing its capacity, indicating a need for improvement and optimization.

Adding a layer of privacy, a zero-knowledge proof protocol was attempted to clear CBDC transactions. Although it successfully hid wallet addresses and payment amount, it led to a significant slow down, raising security concerns. Hence, the bank might consider other options like homomorphic encryption.

The plus side of this mission towards a digitized monetary system is clear—faster, hassle-free transactions, enhanced privacy, and infrastructural efficiency. But it is also poised with various challenges. Security remains a topmost concern, particularly when the system is pushed to its limits. Moreover, the regulatory framework for payments in cryptocurrencies seems to be in its infancy, making it unsuitable for immediate implementation.

The rigorous exploration of sophisticated technologies like the CBDC is indeed marvelous but speaks volumes of the necessity to tread thoughtfully, as any loose ends with regards to privacy or security could spell disaster. A balanced stride towards modernization, integrating the pros yet diligently managing the cons, is indeed the call of the hour. The future is digital, but the road to it is slant and needs careful navigation. The bank’s recent initiative is one such promising stride in this path, a sign of possible transformations awaiting the financial sphere.

Source: Cointelegraph