Concerns Remain Over Risks to Monetary Sovereignty, Financial Stability
South Korea is on the brink of launching its own stablecoin, with increasing backing for a won-pegged version under the leadership of newly-elected President Lee Jae-Myung. This initiative comes amid ongoing discussions regarding the risks associated with early adoption and apprehensions about potentially falling behind in the rapidly evolving digital finance landscape. Stablecoins have garnered significant interest from a variety of financial stakeholders, including commercial banks, fintech companies, central banks, and policymakers, as the momentum for a stablecoin tied to the Korean won grows.
A stablecoin is a cryptocurrency designed to maintain a stable value by being linked to another asset, typically a fiat currency like the US dollar or a commodity such as gold. Unlike fluctuating cryptocurrencies, such as Bitcoin, stablecoins aim to provide a consistent valuation, usually by maintaining a one-to-one peg and being backed by equivalent reserves. With the new administration’s commitment to establishing a won-based stablecoin market, there is a push to incorporate digital assets into the existing financial regulatory framework.
Other countries are advancing in this area as well. In Singapore, there is an increasing exploration of stablecoins for payment purposes. Major retail corporations like Walmart and Amazon are reportedly contemplating the issuance of their own stablecoins. Recently, France’s prominent financial institution, Societe Generale, announced plans to introduce a publicly tradable stablecoin backed by the US dollar.
However, there is resistance within South Korea. The Bank of Korea (BOK) and other financial entities have expressed concerns that a domestic stablecoin could undermine confidence in the national currency and introduce new risks to financial stability. President Lee’s commitment to developing a won-based stablecoin stems from worries that the growing popularity of dollar-backed stablecoins could lead to capital flight. When South Korean investors purchase dollar-pegged stablecoins, like Tether or Circle, they are effectively betting on the strength of the US dollar, which could diminish the status of the won in the global digital asset market.
The BOK has reported that the total trading volume of dollar-pegged stablecoins across South Korea’s five major cryptocurrency exchanges—Upbit, Bithumb, Korbit, Coinone, and Gopax—reached 56.95 trillion won (approximately $41.6 billion) in the first quarter of this year. This figure marks a significant increase from 17.06 trillion won in the third quarter of 2024. The recent appointment of Kim Yong-beom, the former first vice finance minister and head of the crypto think tank Hashed Open Research, as President Lee’s chief economic advisor has further fueled speculation regarding the potential for South Korea’s cryptocurrency sector to gain more policy attention.
During his time at the think tank, Kim advocated that “a regulated Korean won-backed stablecoin could be monitored more effectively than traditional fiat currency.” On Tuesday, Rep. Min Byoung-dug of the Democratic Party of Korea introduced the Digital Asset Framework Act, a legislative proposal aimed at intensifying competition between banking and non-banking entities within the stablecoin sector. This bill would permit corporations, including non-financial firms with a minimum capital of 500 million won (about $360,000), to issue won-backed stablecoins.
Amidst this optimistic outlook, shares of Kakao Pay, a fintech subsidiary of the technology giant Kakao, have nearly doubled in value over the past week, driven by expectations that it could emerge as a significant player in the won-backed stablecoin market. Local banks are also positioning themselves to adapt to the changes, forming task forces and seeking technological partnerships, indicating a transformative shift in the country’s financial sector.
An official from a local commercial bank remarked, “Currently, stablecoins aren’t a highly profitable area for banks. However, if the won-based stablecoin comes to fruition, banks would certainly want a central role.” Should a won-pegged stablecoin be created, it would likely be backed by short-term, low-risk Korean financial assets, akin to its dollar-backed equivalents, which are supported by US government debt and money market funds.
While the conversation around won-pegged stablecoins gains momentum, the BOK remains cautious, warning that such a financial instrument could jeopardize the integrity of the national currency. BOK Governor Rhee Chang-yong expressed at a press conference in May that allowing non-banking entities to issue won-based stablecoins could significantly undermine the effectiveness of monetary policy. He emphasized that if these stablecoins were to become a primary payment method domestically, it would hinder the central bank’s ability to manage monetary flows.
The introduction of stablecoins could lead to an increase in the money supply, potentially impacting the won’s status. An official from the BOK stated that a careful approach is essential. Another area of concern is the potential for cross-border transactions, which could jeopardize the country’s financial stability. Individuals might convert won-based stablecoins into dollar-pegged ones and transfer funds abroad, circumventing traditional financial routes that are typically regulated for international capital movements. While similar issues arise with cryptocurrencies like Bitcoin, these transactions are more closely monitored under local regulations, such as the “travel rule,” which mandates that exchanges verify the identity of senders for international transfers exceeding 1 million won.
