[칼럼] Korea Story 22 - Economy and Finance 5 by Atty Jeong-kee Kim

(Newskorea=Seoul) Digital News Team = Korea Story  22 - 
<Economy and Finance 5  by Atty Jeong-kee Kim>

● What is the Future of Digital Finance?

My particular interest in finance began about four months after I was appointed as the Consul General of Korea in Shanghai, China, a rising global financial center, during the aftermath of the 2008 financial crisis triggered by the collapse of Lehman Brothers.

As widely known, Lehman Brothers was a world-class investment bank with a long history, established in 1850. It was one of the largest investment banks in the United States, alongside Goldman Sachs, Morgan Stanley, and Merrill Lynch. However, in 2008, Lehman Brothers filed for bankruptcy in U.S. federal court, with debts exceeding $600 billion.

The collapse of Lehman Brothers, the largest bankruptcy in U.S. history, was caused by the subprime mortgage crisis. In the U.S., mortgages—loans secured by homes—were offered to individuals, including low-income borrowers, covering up to 90% of the home’s value. Borrowers repaid these loans with interest. As U.S. home prices continued to rise, many people bought homes using these mortgages.

However, when U.S. economic conditions worsened, leading to rising interest rates, many mortgage borrowers defaulted on their payments. This led to the failure of mortgage lenders and small banks, and even large banks began to struggle. Lehman Brothers, overwhelmed by debt, faced a crisis and eventually went bankrupt.

This, in essence, was the Lehman Brothers incident. Following the collapse, many large banks and corporations that incurred significant losses underwent restructuring, leading to high unemployment and a prolonged global economic recession. Korea, too, suffered a severe economic downturn, having already endured the 1997 IMF financial crisis, and now, less than ten years later, facing another economic nightmare.

But why did the global economy suffer from a financial crisis and recession triggered by the U.S., and why was Korea unable to avoid the aftermath?

At the end of World War II, in 1944, an international monetary and financial conference was held in Bretton Woods, New Hampshire, with 44 countries participating. The key issue was exchange rates. At the conference, led by the U.S., the world’s largest holder of gold, it was decided to implement a fixed exchange rate system, where dollars were issued according to the world’s gold reserves. This system, known as the Bretton Woods Agreement, marked the beginning of the U.S. dollar as the global reserve currency.

However, as time passed after World War II, countries like Japan and Germany began catching up to the U.S., and the U.S. dollar's dominance was challenged. In 1971, President Nixon unilaterally suspended the dollar’s gold convertibility, leading to the adoption of a floating exchange rate system. Since then, global financial crises have occurred almost every decade.

Korea, which transformed from a manufacturing powerhouse to a science and technology leader through rapid industrialization, has struggled to overcome recurring global financial crises due to the weakness of its financial sector, enduring considerable hardship.

Is there a way for Korea to become a financial powerhouse without being swayed by the U.S. dollar? Is there a way for Korea to lead a new paradigm and emerge as a global financial leader?

These pressing questions have driven my reflections. Time and again, I concluded that digital finance is the inevitable solution.

If the First and Second Industrial Revolutions were characterized by mechanization and industrialization, the Third Industrial Revolution, which began in the mid-20th century, marked the information age, driven by developments in semiconductors, computers, PCs, and the Internet. Fortunately, Korea was able to join this wave of the Third Industrial Revolution, reaping the benefits of cutting-edge technology for over 30 years, leading to unprecedented prosperity.

However, due to structural weaknesses in its economy, Korea had to endure the 1997 IMF financial crisis. Additionally, the fallout from the 2008 Lehman Brothers collapse resulted in long-term economic stagnation, stalling the nation's growth engine.

When Korea’s per capita income exceeded $20,000, it took more than 10 years of struggle to surpass $30,000 and finally enter the ranks of developed nations. Our failure to effectively respond to the financial crisis delayed this progress.

Though we’ve long spoken of "globalization," little has substantially changed. Someone once said, “Words without action are not words; they are just sounds.” True globalization still feels distant.

Growth centered on manufacturing is no longer sustainable. Manufacturing has already shifted to emerging economies like Brazil, Russia, India, China, and South Africa, and cheap labor is now the domain of developing nations. While the Third Industrial Revolution focused on high-tech, the Fourth Industrial Revolution represents the integration of technology with knowledge, ushering in an era that merges information with finance.

Experts suggest that Korea must shift its focus from "quantitative growth" to "value growth" in order to stay ahead. Digital finance, which is knowledge-based, exemplifies the pursuit of value growth. It is often said that the future is not predicted, but created. Korea must create value and develop a future vision. This urgent paradigm shift in finance can no longer be delayed.

Digital banking enables financial transactions anytime, anywhere, without temporal or spatial limitations. It is also familiar to us—Internet banking, mobile banking, and ubiquitous banking, all offered by our financial institutions, fall under the umbrella of digital finance. Many people are already using these services in their daily lives, and Internet-only banks have also emerged.

The advantages of digital finance are numerous, with limitless development potential. First, it eliminates the need for complicated, in-person banking transactions. Financial services are accessible without time and place restrictions, and transaction fees are reduced. Financial institutions can also improve efficiency and profitability.

Additionally, international remittances and transfers are possible with lower fees, and transaction records are instantly available. Financial certificates and other related documents can be easily issued.

The infrastructure for digital finance has been well established since the Third Industrial Revolution, with electronic networks like the Internet and the widespread use of computers and smartphones, enhancing convenience.

"FinTech," a combination of finance and information technology, is not a new financial system. Financial institutions in Korea implemented online systems long ago. Automated teller machines (ATMs) and online stock trading are all products of fintech.

However, as diverse financial services expand in the Internet and mobile spaces, the importance of nurturing fintech has grown. While financial companies traditionally led fintech innovation, information and communication companies are now entering the financial sector.

For example, global IT giants like Google, Amazon, and Apple have entered the fintech industry and are eyeing the Korean market. Taiwan, Singapore, and China, major IT players, are also entering Korea’s fintech space, raising concerns that they could significantly encroach on our market.

In response, Korean IT companies are actively participating in fintech competition. Companies like Kakao Pay, Line Pay, and Samsung (with Samsung Pay) are examples. Fintech is expected to bring significant changes to the global financial industry in the future.

The Korean government is also preparing for a cashless financial system, significantly increasing support for fintech companies and digital currency development.

Following the "Fintech Development Roadmap," the Financial Services Commission has established a task force to institutionalize digital currency, analyzing trends in advanced fintech nations, and reviewing its implementation. This aligns with the global trend of decreasing reliance on physical currency.

The world is rapidly transitioning into a digital financial society where cashless transactions are the norm. Increasingly, countries are moving towards mobile payments, even in small markets, and some have stopped issuing coins and banknotes altogether.

Korea’s financial sector is also racing to build a blockchain consortium to keep up with global trends, though progress has slowed due to the lack of a clear definition of "digital currency." For instance, Korea is still grappling with how to legally classify virtual currencies like Bitcoin, which have caused considerable controversy.

I have concluded that digital finance is the only way for Korea to dream of the future in the context of the Fourth Industrial Revolution and secure a pioneering position in the global market. I have laid out the background for this conclusion in detail. To become the global information-finance hub, Korea must focus all efforts on digital finance.

Of course, digital finance is not without challenges. Since financial transactions occur online via computers or networks, there are risks such as hacking or phishing.

However, these risks are not fundamental obstacles. They can be addressed through regulatory frameworks and technological solutions. For instance, regulations like the Electronic Financial Transactions Act offer a way to mitigate such risks.

In particular, I examined digital currency or virtual currency, based on blockchain technology. South Korea has recognized that in order to lead in digital finance, it must also take the lead in the digital currency market.

Currently, South Korea’s share of the global virtual currency market exceeds 20%. This has led to the emergence of the term "Kimchi Premium," referring to the high market share of Korea’s virtual currencies in the global arena.

No one can predict the future of finance—it is truly unpredictable. During periods of paradigm shifts, there is always the risk of trial and error. However, without risk-taking, it is difficult to expect transformative development. As the world changes, Korea must embrace these risks and take leadership in the global market.

☆ Author:  Atty Jeong-kee Kim ☆

● Education
- Bachelor of Arts in Political Science, Summa Cum Laude, State University of New York at Stony Brook
-  Doctor of Jurisprudence, Marquette University Law School
- Senior Executive Program, John F. Kennedy School of Government, Harvard University
- Research Scholar in North Korean Studies, Peking University

● Experience
- Consul General of the Republic of Korea in Shanghai
- Commissioner General for the Korean Pavilion at the 2010 Shanghai Expo
- CEO, Asia-Pacific Local Government Network for Economic and Social Development (CityNet)
- Secretary General, World Smart Sustainable Cities Organization(WeGO)
- Law Clerk, Milwaukee Circuit Court, USA
- Senior Attorney-at-Law, Dr & Aju LLC
- Distinguished Visiting Professor, World Economy Research Institute, Nanjing University
- Research Professor, Institute of Oriental Studies, Peking University
- Distinguished Professor, Graduate School of Political Science, Kookmin University
- Chair Professor, Graduate School of Business, Dongguk University
- First President of Soongsil Cyber University

● Publications
- Georo English Studies Series for College Students [10 volumes] (Georo Publishing)
- I Challenge the Possibility of One Percent (Chosun Ilbo)
- The Art of Negotiation (Cheongnyonneongsin Publishing)
- Korea and the World (Chekmidum Publishing)