Blockchain Technology: Opportunities and Challenges for Korean Financial Industry

Abstract

ABSTRACT:

Certain technologies have a transformative effect on an economy. Heralded as the next big thing (Giancarlo, 2016), Blockchain technology (also referred to as distributed ledger technology) carries strong potential to revamp public and private sector institutions (Walport, 2015

Swan, 2015). Blockchain technology is Internet based and it allows for faster transactions transmission at extremely low transaction costs, transparent ledger capability, record keeping capacity, open access network ability and Internet-based global reach. Given these benefits, Blockchain technology can be quite lucrative for the finance industry (Brainard, 2016)). Distributed ledger technology has broad applications, even beyond the finance sector. Blockchain based tools such as Ethereum and smart contracts allow for automated low risk decision-making, enhanced productivity, machine-to-machine connectivity and even 'Internet economy' (Pureswaran and Brody, 2015

Mougayar, 2016). Several governments, financial institutions and organizations have therefore shown an avid interest in the research, development and application of Blockchain technology. South Korea, one of the most connected (wired) (ICT, 2015) and technologically advanced countries, has much to gain by investing in distributed ledger technology. South Korea is also familiar with the older version of the technology, Bitcoin Blockchain 1.0 (Lee, 2013

Kim, 2014

Coindesk a., 2014). However, while governments and firms in the West have moved on to testing, Blockchain 2.0, South Korea is yet to move forward. By building on its existing understanding of the distributed ledger technology, South Korea has much to gain by investing in Blockchain 2.0, a sentiment also supported by Bank of Korea (Kim, 2016).

In this paper, we look at Blockchain technology's potential application in Korea with a focus on the Korean financial industry. In conducting research and analysis, since distributed ledger technology is rather new (conceptualized in 2008) and given the limited amount of data, this paper applies comparative research methodology to identify opportunities and challenges for the Korean finance markets. Additionally as distributed ledger technology has broad applications for different financial products, the paper limits its analysis to potential applications for 'the near future'1 (This paper follows the Euroclear timeline for 'near future' application of Blockchain technology, namely a period of approximately five to ten years (Oliver Wyman and Euroclear, 2015)). This paper is divided in four sections. Section I provides a brief introduction of distributed ledger technology in the wider context of the current fintech trend. Section II of the paper provides a literature review of Blockchain technology including details on its technical background, general advantages, limitations, and contemporary worldview towards the technology. Section III of the paper looks at the Korean case, and identifies areas of opportunity and challenges for the Korean financial industry. The final part of the paper provides policy suggestions and recommendations for application of the technology in Korean financial markets.

Based on existing detailed studies of distributed ledger technology, Korean financial markets structure, and user cases, the paper concludes that lucrative opportunities for application of distributed ledger technology exist in financial functions of post-trade settlements, cross-border payments, remittances, corporate payments, trade monitoring, reporting, risk management and collateral management. In aligning these opportunities to specific financial markets, opportunities are deemed to exist in money markets, capital markets, derivatives market and foreign exchange markets of the Korean finance industry. The paper also lists challenges of regulatory restrictions, scalability issues, data security, data privacy and data reliability concerns, and social issues that need to be addressed for the successful integration of distributed ledger technology in Korean finance markets.