Bank of Korea Advocates Cautious Stablecoin Adoption Amid Policy Concerns

The Bank of Korea has adopted a cautious stance on the adoption of stablecoins, recognizing their importance while stressing the need for stringent regulation. Governor Rhee Chang-yong has previously expressed worries about the potential impact of stablecoins on monetary policy. He acknowledged that won-backed stablecoins are crucial for Korea's financial sovereignty but also emphasized the need to assess their effects on foreign exchange management.

The global trend of exploring stablecoins is evident, with various countries and private entities evaluating their benefits and risks. Stablecoins, which are cryptocurrencies tied to other assets to maintain a stable value, are seen as a strategic tool to enhance financial sovereignty and reduce dependence on foreign digital currencies. The Bank of Korea's position aligns with the growing consensus among experts that the development of stablecoins is inevitable, despite concerns about their impact on the monetary policy system.

The new administration under Lee Jae Myung is eager to capitalize on the stablecoin market, viewing it as a means to bolster Korea's financial independence. This initiative is part of a broader effort to integrate digital currencies into the financial landscape. The ruling Democratic Party has proposed the Digital Asset Basic Act, which aims to establish a clear regulatory framework for private entities to issue stablecoins. This act addresses the lack of a legal pathway that had previously hindered Korean companies from entering the market.

Under the proposed act, companies with at least 500 million won in equity capital would be permitted to issue stablecoins, provided they guarantee redemptions through secured reserves. The digital assets, including stablecoins, must also be approved by the Financial Services Commission. However, some experts argue that the equity requirement is too low, potentially allowing almost anyone to issue a stablecoin. This could create market confusion and undermine the reliability of Korean stablecoins in the global market.

Governor Rhee Chang-yong has expressed concerns about the potential threats stablecoins pose to the monetary policy system. He noted that allowing non-bank institutions to issue won-backed stablecoins could undermine the effectiveness of monetary policy, as stablecoins could act as a substitute for currency. Rhee also highlighted the need for institutional measures to prevent traders from circumventing foreign exchange markets and to maintain the central bank's control over the currency exchange rate.

Despite these concerns, the Bank of Korea is advocating for a gradual rollout of won-based stablecoins through regulated banks. This approach aims to integrate stablecoins into the financial system while minimizing potential side effects. The Bank of Korea's stance reflects a balanced view, recognizing the benefits of stablecoins while addressing the regulatory challenges they present. This measured approach is crucial for ensuring that stablecoins can contribute to Korea's financial sovereignty without compromising the stability of the monetary policy system.