Yesterday, the Bank of Korea (BOK) released its 2022 Payment and Settlement Systems Report, which, among other things, delves into the current state of work on its central bank digital currency (CBDC), the digital won.

The document says the central bank has now “greatly expanded” dedicated CBDC staff to meet growing research demands on system designs and institutional issues. He also reflects on his recent CBDC experiments, which have included working with 14 banks on things like DLT payments for digital assets and cross-border transactions.

Expanded digital gained research capacity

Against the backdrop of declining cash use and accelerating digital transformation, the BOK has been intensifying efforts to assess the desirability and feasibility of potential digital gain. In 2021, the share of cash payments fell below fifteen percent in value terms and 22% based on the number of transactions, prompting the central bank to start laying the groundwork for a hypothetical launch.

That has included a “massive” expansion of its CBDC research unit from one to four dedicated teams starting in February 2023. The BOK says it needs deeper research into technical and institutional matters and strengthened cooperation with international organizations and foreign central banks. Recently, the BOK participated as an observer institution in the mBridge project for cross-border CBDC.

Experimental CBDC Progress

In addition, the BOK carried out two simulation projects between 2021 and 2022 to test the feasibility of the selected design models and build the technical foundation for a possible CBDC system.

The first involved creating a cloud-based virtual sandbox environment to simulate the most basic CBDC functions: minting, issuance, circulation, redemption, and destruction, as well as some extended functionality, including offline transactions, purchases of digital assets, and cross-border payments. These various components were then retested “in an environment closer to real-world settings” in cooperation with 14 commercial banks and the Korea Institute of Financial Telecommunication and Clearing (KFTC), which manages several interbank payment systems.

However, as we previously reported, while the BOK was generally pleased with the results of offline payments and smart contract-based transactions, the simulations highlighted performance issues with blockchain technology. The system was able to process up to 2,000 transactions per second (TPS), but after that, the processing speed dropped dramatically. You found these results during initial simulations and they were exacerbated when additional parties were involved. This is partly related to the geographical dispersion of the nodes and the disparities between the different systems of the participants, which could lead to scalability problems in the future if standard systems are not introduced.

Next steps

Looking ahead, the BOK wants to strengthen its technical and institutional base to identify the system design that best suits Korea’s financial and economic environment. In addition to its enhanced research capability, it is also gearing up to test different CBDC use cases and broaden the participants. It is already working with banks, but now wants to work with fintechs and non-bank financial institutions, which could indicate capital markets use cases.

The BOK also stated that it will “participate in the BIS Innovation Hub project to improve cross-border payments using CBDC.” The BIS has many cross-border CBDC projects, but one making headway in Asia is MBridge, where Korea is already an observer.