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Dec.

22, 2016

Title : Present Status and Key Issues of Distributed Ledger


Technology Publication of Joint Research Results
The Bank of Korea, together with IT companies(Coinplug, Inc),
academics, and financial experts, conducted a joint research on
distributed ledger technology and published a report on the esults.
* From April to October 2016, the Korea Payment & Settlement Association (Sekyung Oh, Jae-pil Kim, Young-hwan Lee, and Hyuk-joon Kwon) and Coinplug,
Inc. were in charge and worked together on policy issues and technological
issues; major domestic banks and the Fintech practitioner of the KFTC as coresearcher were also key players.

This study comprehensively reviewed and introduced the recent


development of distributed ledger technology and the utilization
on financial sector. Also, major policy issues, including digital
currency and regulations of distributed ledger technology, have
been reviewed.
In particular, it has quantitatively estimated the cost-cutting effect
of the application of the distributed ledger technology for the first
time in Korea. It presented technical suggestion to implement the
technology for major settlement services such as the Bank of
Korea settlement network..
This booklet will be used as a reference material for research on longterm strategy and research on distributed ledger technology of
financial institutions and policy authorities. Also, it is expected that
the booklet will help financial institutions to develop distributed
technology and technology-based systems and services in near
future.
The following can also be viewed on the Bank of Korea webpage
(www.bok.or.kr)
Contact Information:
Head of Bank of Korea Billing Research Team Kyu-soo Kim (02-750-6612), Director
Dong-seop Kim (02-750-6640)
Fax: 02-759-6660, Email : kkyusoo@bok.or.kr, kimds@bok.or.kr : Tel (02) 759-4015,
4016
The press release of the Bank of Korea is on the internet (http://www.bok.or.kr)

Current Status and Major Issues of


Distributed Ledger Technology (Summary)
. Policy Issues
(1) Expected Effect Analysis

(Cost Reduction)
Based on the high level of security, efficiency, and promptness
of settlement of distributed ledger technology, we expect to see
significant cost savings when applying financial services.
Distributed Ledger Technology Cost Reduction Factor
Division

IT System

Management
Aspect

Saving Factors
Reduce application
development costs
Lower infrastructure
procurement costs
Reduce the cost of developing
intermediate structures
Reduce auditing costs
Reduce paper document
management costs
Reduce labor costs

Based on previous overseas research (Goldman Sachs (2016)


etc.), at the Securities sector(exchange and depository), the
back office cost (IT cost, labor, etc.) will have a reduction effect
of 107.7 billion won (16% of total cost) as of 2015.

-1-

In addition, the effect of savings on securities firms financial


costs (including opportunity costs due to deposits) will total
around 10 billion won.
Securities sector back office cost reduction as of 2015.
(Unit: 100 million won)

Korean
Exchange
Total cost
Pure IT costs
Welfare and labor
costs
SG&A expenses
Effect of cost
reduction

5,508
1,186
2,351

Korean
Securities
Depository
1,188
70
605

1,971
881

513
190

However, it is difficult to quantify the cost-saving effect because


the services, such as banking, are broad and the segmentation and
cost classification of the process is unclear.
It is necessary to estimate the effects of financial institution
cost reduction and direct and indirect cost savings for
consumers by subdividing services such as specific
remittance and certification.
(Change in Financial Infrastructure)
Through distributed ledger technology, it is expected to cause
structural change in financial structure in mid to long term,
through disintermediation and automation.

-2-

Financial Infrastructure Changes by Sector


Division
International
remittance
Capital
Market
Trade Finance
Regulatory
Compliance
and Auditing
AML/CFT
Insurance
P2P Loan and
Insurance

Structural Change
Distributed ledger technology could replace
existing infrastructures such as intermediary
banks and SWIFT (Ripple, etc.)
The issuance, registration, and trading of securities
becomes efficient and existing intermediaries role
will be diminished
Existing manual financial transaction procedures
are automated to increase the efficiency and
reduce the probability of accidents
Real-time reporting and auditing of transaction data
is possible, and cross-agency comparison and
integration is easy
Easily share customer identity information and
reduce regulatory compliance costs
Automated claims and payments and reduced
insurance fraud risk
Activate microfinance and micro insurance

(2) Risk and Regulatory Measures

(Digital Currency)
Proper regulation is necessary because digital currency can be
used to abuse law by money laundering and committing crime
by anonymity, and technical incompleteness.

-3-

Regulation of digital currency is currently in the U.S., EU, Japan


and in other major countries.

Introduction of Regulation by Country


Country

U.S.

EU

Japan

Introduction of Regulation
FinCen(2013): Anti-money laundering regulation
applied to exchanges
National Tax Service(2014): Taxation of property
taxes on digital currencies
Futures Trading Commission(2015): Bitcoin
derivative product supervision
State of New York (2015): Bitlicense introduction
Bank Authority(2013): Digital call consumer
warning
European Commission(2016): Anti-money
laundering regulations applied to exchanges
Financial Services Agency(2016) etc. : Applied to
regulations on exchanges, excluding consumption
tax for bitcoin trading

(Distributed Ledger Technology)


It is expected that the risk of the existing financial systems will
be eased considerably when distributed ledger technology is
applied.
As financial transactions are processed securely in real time,
counterparty risks and operational risks will be dramatically
reduced.

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By realizing real-time information on transaction history and


automated regulatory compliance, RegTech is easy to apply
and more effectively manage risks.
However, it is necessary to check the risk factors that are newly
generated or augmented by the introduction of the distributed
ledger technology.
In particular, security risks and legal risk are likely to increase
as well as merging of the smart contracts combined with
distributed ledger technology
Programming error and smart contracts invalidation due to attacks on DDoS.

-5-

(Regulatory Measure)
The regulation of the financial authorities should be based on
the following principles:
1 Do not hinder innovation and cope with risks properly
2 Flexible response to changes in digital currency and distributed ledger
technology.
3 Establish a regulatory system considering the business structure inherent in the
business model
4 Impose market sanctions and induce soundness of related businesses

On the other hand, technology standardization solution needs to


be built for distributed ledger technology interconnection, web
application development, and cross-industry infrastructure
establishment.

(3) Issuance of Central Bank Digital Currency


The economic impact of central bank digital currency issuance
needs a comprehensive review, which has been actively
discussed recently by major central banks.
When the central bank issues digital currencies directly to
individual and non-financial companies using distributed
ledger technology
Beyond replacing real money, digital currency will compete with
existing commercial bank deposits and have a broad impact on
macroeconomics, monetary policy, financial stability, and
payment settlement.

-6-

The size of substituting commercial bank deposits for the


issuance of digital currencies by the central bank is
determined

by

the

degree

of

granting

functions,

the

guarantee of anonymity, and the payment of interest.


Until now, there have been no examples of digital currency
issuance based on the distributed branch technology, and the
stability and security of the system has not been fully verified.

Therefore, it is necessary to continue research and


development to ensure the verification and safety of related
technologies while monitoring the development cases of
major central banks.

In addition, it is necessary to examine diverse scenarios of the


subject of issuance and issuance of digital currencies in the
central bank, as well as various studies in terms of laws and
systems.

. Technical Issues

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(1) Status of Technology Development

(Consortium, etc.)
Since the blockchain is a distributed network-based platform, a
large number of financial institutions and IT companies usually
develop consortia to jointly develop distributed technology.

-8-

Major Global Distributed Ledger Technology Consortium


Consortiu Participating Organizations
m

Key Features

Established US IT company
R3
Over 60 large financial
institutions including
R3
Goldman Sachs and UBS
Five
domestic
banks
(Kookmin, Shinhan, Hana,
Woori, IBK)
Linux foundation managed
Over
100
companies
including
financial
institutions
and
nonHyperLedge
financial IT companies,
r
domestic
companies
(Korea
Securities
Depository,
Coinplug,
Samsung SDS)
SBI FinTech
Japanese SBI financial group
Consortium Participating in Ripple,
Coinplug, etc.
Led by Chinese enterprise
ChinaLedge Wanxiang
r
Participation in 11 large
financial institutions in China

Developed contract
record management
system (Corda) for
financial institution

Open source
Research and
development of
blockchain platform

R3 and Ethereum
foundation joined as
advisors.

In addition, attempts have been made to develop a new


blockchain protocol, such as Ethereum and Ripple to improve on
the existing problems of bitcoin blockchain.

Main Blockchain Protocol


Protocol

Characteristic

Status

Ethereum

Specialized in smart
contracts Reduced
transaction time (12
seconds)

Issued virtual money


(ETH)
Hacking incident (DAO)

-9-

Ripple

Specialized in
international transfers
Real-time settlement
liquidation system

- 10 -

Issued Virtual Currency


(XRP)

(Sector)

Financial institutions, IT companies, central banks, and


governments are actively pursuing measure to improve the
efficiency of existing infrastructure or to develop new services
using distributed ledger technology.
Sector

Finance

Central
Bank

Governm
ent

IT
Compani
es, Etc.

Utilization Plan

Company

Foreign remittance

MUFG, VISA, JP Morgan,


etc.
UBS, Deutsche Bank,
etc.
NASDAQ, Overstock, etc.

Remittance from the


head office
Capital market
transactions (over-thecounter market)
Records management
Back office
Digital currency issue
Record your pension
receipts and usage history
Resident registration and
voting
Land ownership
registration
Genuine registration
(precious metals, watches,
etc.)
Development of
infrastructure technology

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Mizuho, etc.
MUFG (Promissory Note),
etc.
England, Netherlands,
Canada
England
Estonia, Russia, etc.
Sweden
Everledger

IBM, Microsoft

(2) Characteristics of Distributed Ledger Technology by Type


Distributed Ledger Technology can be divided into open (Public)
blockchain and closed (private) blockchain.
Distributed Ledger Technology Comparison by Type
Record
viewing/archiving
Transaction
participation/appr
oval
Agreement
Password
Billing
completeness
Scalability
Case

Pros and Cons

Field of
Application

Public

Private

Anyone can participate


without restriction

Can be arbitrarily limited


as needed

Proof of work, proof of


stake, etc.
Need
Network branch
possibility
Limited
Bitcoin, Ethereum, etc.
- High safety and
reliability
- High transparency and
anonymity
- Difficult to keep
financial transactions
confidential
Low scalability and
efficiency
International
remittance,
crowdfunding,
recording, and storage
of assets and
information

BFT(Byzantine Fault
Tolerance)
Unnecessary
Ensure system integrity

- 12 -

Freedom to choose
R3, Hyperledger, etc.
- Can set range of
information sharing
- High efficiency and
scalability
- Security Vulnerability

Payment system,
identity/document
authentication, trade
finance, smart contract,
etc.

(3) Application Plan


In order to utilize distributed ledger technology in financial
services, it is necessary to resolve technical issues such as
securing trade secrets, controlling authority, maintaining trust
and security, and securing scalability.
Shinhan Bank reviewed the solutions for each task by
suggesting the situation of applying the distributed ledger
technology to the financial network and suggested specific
implementation plan.
Problem

Solutions

Privacy
Authority
Control
Ensuring
Reliability
Scalability

PKI based Key Exchange


Supernode (Central Manager) is required
Only the central manager and the trading
partner has access to transaction information
Confidential Transactions (eg. Hyperledger)
Applicable to distributed systems
Maintain anonymity and make deals with
parties for access deal information
Separated into Supernode (Token Issuer) and
other participants (Token User)
Periodically record the hash code of the
distributed ledger (Merkle Root) into an
public blockchain (bitcoin)
More than 3,000 transactions per second

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Diagram of Payment System Using Distributed Ledger


Technology

- 14 -