South Korea's Stablecoin Regulatory Dilemma and Monetary Risk: Navigating the Won-Pegged Ecosystem's Investment Landscape

South Korea, a global leader in fintech innovation, is at a crossroads in its approach to stablecoins. The country's regulatory framework for won-pegged stablecoins is evolving rapidly, shaped by competing priorities: fostering financial innovation while safeguarding monetary stability. As the Financial Services Commission (FSC) and Bank of Korea (BOK) grapple with the risks and opportunities of this nascent asset class, investors and institutions are left to navigate a complex landscape of policy uncertainty, technological experimentation, and market dynamics.

The Regulatory Tightrope: FSC's Ban on Interest Payments

In a move echoing the U.S. GENIUS Act, the FSC has announced plans to prohibit interest payments on stablecoins by the end of 2025, a Bitcoinist report says. This decision aims to prevent stablecoins from competing with traditional bank deposits, which are subject to stricter capital requirements and regulatory oversight. By curbing yield-bearing stablecoin products, the FSC seeks to mitigate systemic risks while maintaining a level playing field for financial institutions. However, this restriction could also dampen demand for stablecoins among retail investors, who have increasingly turned to these assets for passive income generation.

The regulatory shift reflects a broader global trend. Central banks and regulators are tightening rules around stablecoins to address concerns about financial stability, consumer protection, and monetary policy independence. For South Korea, the stakes are particularly high: the country's digital economy is deeply integrated with global crypto markets, and won-pegged stablecoins could either bolster or undermine this position.

BOK's War on Depegging: A Bank-First Approach

While the FSC focuses on consumer-facing risks, the BOK has zeroed in on the structural vulnerabilities of private stablecoins. In a stark warning, the central bank highlighted the "fragility of stablecoin value," citing historical depegging events like the 2023 USDC crisis and the 2022 Terra/Luna collapse, as reported in a Bitcoinist article. The BOK argues that private entities issuing won-pegged stablecoins lack the institutional safeguards to manage reserve liquidity, exposing the broader economy to depegging risks and capital flight.

To address this, the BOK is advocating for a "bank-first" model, where only regulated financial institutions-ideally banks-can issue stablecoins, a Yahoo article says. This approach would centralize reserve management under entities with access to central bank liquidity tools, reducing the likelihood of destabilizing runs on stablecoin reserves. The central bank's stance has already spurred action: major banks like Woori Bank and BDACS have partnered to launch KRW1, South Korea's first fully regulated won-backed stablecoin, built on the Avalanche blockchain, as detailed in a Yahoo report.

Market Responses: Innovation Amid Uncertainty

Despite regulatory headwinds, the private sector is racing to fill the void left by the BOK's cautious stance. With the central bank's digital won project paused in Q2 2025, a CCN explainer notes, commercial banks, fintech firms, and blockchain startups are collaborating to develop compliant stablecoin solutions. These efforts are supported by the FSC's Virtual Asset User Protection Act (VAUPA), as documented in a ScienceDirect article, which mandates full reserve backing, third-party audits, and anti-money laundering (AML) compliance for stablecoin issuers.

One notable initiative is Project Hangang, a pilot program by the BOK to issue deposit tokens on its own blockchain infrastructure, which the Yahoo report also highlighted. This hybrid model-combining central bank oversight with blockchain efficiency-could serve as a blueprint for future stablecoin frameworks. Meanwhile, analysts like Andrei Grachev argue, in a Blockchain Reporter article, that a well-regulated won-backed stablecoin could become foundational infrastructure for South Korea's digital economy, enabling on-chain settlements and reducing reliance on U.S.-pegged stablecoins.

Investment Risks and Opportunities

For investors, the won-pegged stablecoin market presents a paradox: high potential for growth, but with significant regulatory and operational risks. On one hand, the BOK's emphasis on bank-led issuance could create a robust, transparent ecosystem that attracts institutional capital. On the other hand, the FSC's restrictions on interest-bearing products may limit retail adoption, at least in the short term.

Key opportunities include:
- Infrastructure Development: Firms involved in building blockchain platforms for regulated stablecoins (e.g., Avalanche, BDACS) could benefit from increased demand for compliant infrastructure, as the Yahoo report noted.
- Bank-Led Tokens: Early movers in bank-issued stablecoins, such as KRW1, may capture market share as the ecosystem matures, according to the Yahoo report.
- Cross-Border Trade: A stable, regulated won-backed stablecoin could facilitate South Korea's export-driven economy by enabling faster, cheaper international transactions, a point analysts have also made in coverage by Blockchain Reporter.

However, risks remain acute. Depegging events, if they occur, could erode trust in the entire ecosystem. Additionally, regulatory debates-such as whether non-bank entities should be allowed to issue stablecoins-could delay market clarity, a concern the CCN explainer discussed.

Conclusion: Balancing Innovation and Stability

South Korea's stablecoin regulatory dilemma mirrors a global challenge: how to harness the benefits of digital assets without compromising financial stability. The FSC and BOK's coordinated approach-restricting speculative uses while promoting bank-led innovation-offers a potential middle path. For investors, the key will be to monitor regulatory developments closely and prioritize projects with strong institutional backing and transparent reserve management.

As the won-pegged stablecoin ecosystem evolves, South Korea's experience could serve as a model for other nations navigating the same regulatory tightrope. The question is not whether stablecoins will play a role in the future of finance, but how they will be governed to ensure both innovation and stability.