Bank of Korea's 2nd Phase of CBDC Tests Reveal Limitations in Blockchain Technology

The Bank of Korea has announced that its second-phase central bank digital currency (CBDC) experiment has been completed, a phase that focussed on offline transactability, interest payment and redemption, cross-border remittance, etc. The first phase was conducted from August to December last year. At that time, the bank checked basic CBDC functions such as issuance and circulation in a distributed ledger-based cloud environment. The second phase was about whether the digital currency is expandable and compatible with new technologies such as zero-knowledge (ZK) proof.

While it was happy with some aspects of its Digital Won simulations, such as using CBDC for offline payments and cross border remittances, the central bank highlighted performance issues with the blockchain technology.

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

There will be some limitations in the real-time processing of transactions during peak times, said the Bank of Korea in a press release shared with local media outlet Yonhap News.

One of its tests simulated peak demand by sustaining 4,200 transactions per second (TPS) for 30 minutes. At that activity level, 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 such as lunchtimes or payment deadlines.

The scalability limitations of Ethereum are widely known, and in response, numerous Layer 2 scaling solutions have been deployed in the crypto sector, particularly rollups. The Bank of Korea tried using rollups with up to 700 transactions on each subnetwork. The rollups performed fine when both sides of the transaction took place on the same subnetwork. However, there were very significant performance issues when a large proportion of transactions were between subnetworks.

The bank also tested whether NFT transactions can be carried out between different distributed ledger platforms and whether state intervention in the CBDC system is possible. In the former test, the bank successfully handled cross-border remittance on the assumption that the South Korean and US governments issued CBDCs based on different distributed ledgers. In the latter, the bank applied money laundering prevention regulations and virtual terrorist funding monitoring systems so that the regulatory authorities can access data related to suspicious transactions.