The Bank of Korea completed the second phase of its retail central bank digital currency (CBDC) simulations in late June and shared the results today. While it was pleased with some aspects of its digital simulations, such as the use of CBDCs for offline payments and cross-border remittances, the central bank highlighted performance issues with blockchain technology.

Specifically, it found the overall performance of the Ethereum-based blockchain to be insufficient, including the scaling solutions and privacy technology that were tested.

“There will be some limitations on real-time transaction processing during peak hours,” the Bank of Korea said.

One of their tests simulated peak demand by sustaining 4,200 transactions per second (TPS) for 30 minutes. At that level of activity, users sometimes had to wait up to a minute for a response (latency).

However, the system can handle an average TPS of 1,000, which is typical of many Korean micropayment systems, but not peak periods like lunch breaks or payment deadlines.

Ethereum’s scalability limitations are widely known, and in response, numerous Layer 2 scaling solutions have been implemented in the cryptocurrency industry, particularly rollups. The Bank of Korea attempted to use summaries with up to 700 transactions on each subnet. Rollups worked fine when both sides of the transaction were done on the same subnet. However, there were very significant performance issues when a large proportion of transactions were between subnets.

Another performance challenge related to the use of Zero Knowledge Proofs (ZKP). This technology can prove that someone owns the CBDC without exposing the details of their identity data. The central bank found that using ZKP required up to 14 seconds per transaction. ZKP is also known to have performance issues, although some workarounds mitigate this somewhat. We are not clear which ones were used.

The bank also tested cross-ledger transfers using different blockchain technologies for purchasing non-fungible tokens and for sending cross-border CBDC remittances. He used hash time lock contracts (HTLC) and was satisfied with these. Cross-border CBDC with the United States was simulated and commercial banks were used as intermediaries.

CBDC Technology Partners

As previously reported, the central bank selected Ground X as its main technology partner for the simulations. Ground X is the web3 subsidiary of Korea’s largest social network, Kakao, and the founder of the public semi-licensed blockchain Klaytn. Klaytn is based on Ethereum technology, and for its launch it partnered with Ethereum development house ConsenSys, which is still involved in the project.

Other companies involved in the project include Samsung Electronics, KPMG, Kakao Bank, Kakao Pay, S-core (digital transformation consultants), Kona I (prepaid cards), Dream Security (authentication), Zkrypto (zero-knowledge proofs), OnTher (layer 2) and NGLE (software testing).

Now that the second phase of simulations has been completed, the central bank has started working with 14 commercial banks and the Korea Institute of Financial Telecommunications and Clearing (KFTC). The banks are Kookmin, Shinhan, Woori, Hana, Nonghyup, Enterprise, Suhyup, Busan, Gyeongnam, Daegu, Gwangju, Jeonbuk, Kakao, and K.

Next steps for CBDC

The Bank of Korea outlined its next phase of work that focuses on banks. For example, the ability to integrate the simulation system with the banks’ internal systems. And to check performance when onboarding a large number of users. You are creating a Virtual Private Network to securely communicate with these intermediary banks.

In addition to the purely technical aspects, it also plans to explore possible use cases and is considering involving other types of companies in the simulations, such as credit card companies and securities companies.

The central bank has also hinted at possible additional cross-border experiments. “We plan to cooperate with financial institutions and international organizations,” she said.

Meanwhile, several central banks around the world are moving forward with their tests. Both the Monetary Authority of Singapore (MAS) and the European Central Bank (ECB) are starting to separately explore programmable money applications of retail CBDCs.

There is a growing number of cross-border CBDC projects. Hong Kong’s MBbridge recently shared its latest results and announced plans to go into production. MBridge includes the central banks of Hong Kong, China, the United Arab Emirates and Thailand.

A new Mariana Project, which includes the central banks of France, Switzerland, and Singapore, will explore the use of DeFi for foreign exchange for cross-border CBDCs. The New York Federal Reserve launched the Cedar Project for faster foreign exchange settlement. And the MAS announced the Ubin+ Project for cross-border payments. These are all CBDC wholesale projects.

Two of these, MBridge and Cedar, have built bespoke blockchains in part to address performance challenges.

Additionally, there is the Icebreaker Project involving the central banks of Norway, Sweden, and Israel to explore cross-border retail CBDC payments.