As you can see in the video, I managed to make a crude prototype of a dialogue and choice system. It works a little like a CYOA book, where there is a "page" for each text box that is read by the game after you hit enter or Z or whatever. There is a group of events dedicated to movement, and another dedicated to controlling the list of options, one is disabled when the other is enabled so you can't move around when a selection is open. I also had to set up a separate sensor to detect NPC's. In the game at all times there are two invisible sprites next to the player which detect walls or npc's, and let you interact accordingly. Naturally, graphics will be improved in future versions after the more important stuff is ironed out.
Also, introducing for the first time a new character, Eliza, who will be assisting me in the future trials and the final version of this Test-Game which will be released when it is complete.
My next steps will be to probably set up more complicated dialogue or scripted motion with the player and npc, like what you would see in a spanking event from the old version. All in all, I think I'm making good pace.