Bank of Korea Rejects Bitcoin for Reserves Citing Volatility

The Bank of Korea has announced a cautious approach towards the potential inclusion of Bitcoin in its foreign exchange reserves. In a response to a written inquiry on March 16, officials from the Korean central bank stated that they have not explored the possibility of adding Bitcoin to their reserves, primarily due to the cryptocurrency's high volatility. The central bank emphasized that any asset considered for inclusion in their reserves must meet specific criteria, including liquidity, immediate usability, and a credit rating of investment grade or higher, which Bitcoin currently does not satisfy.

The central bank's stance was reiterated in response to a question from Representative Cha Gyu-geun of the National Assembly’s Planning and Finance Committee. The officials noted that while there have been discussions globally about the role of crypto assets in national financial strategies, the Bank of Korea remains steadfast in its cautious approach. The decision comes amidst increasing global discussions on the role of crypto assets in national financial strategies, sparked by recent developments in other countries.

Despite calls from some members of Korea’s Democratic Party and crypto industry lobbyists to integrate Bitcoin into the national reserves and develop a won-backed stablecoin, the Bank of Korea maintains that its foreign exchange reserves must adhere to strict criteria. These criteria include liquidity, immediate usability, and a credit rating of investment grade or higher, which Bitcoin does not currently meet. The central bank's decision underscores its commitment to maintaining the stability and reliability of its foreign exchange reserves, prioritizing traditional assets that offer more predictable returns and lower risk.

Professor Yang Jun-seok of Catholic University of Korea concurred with the central bank's stance, stating that it is appropriate for foreign exchange to be held in proportion to the currencies of countries with which Korea trades. Professor Kang Tae-soo from the KAIST Graduate School of Finance commented on the potential for stablecoins to be leveraged by the US to maintain dollar hegemony, adding that the recognition of stablecoins as foreign exchange reserves by the IMF in the future is an important consideration.

The Bank of Korea's decision reflects a broader trend in the region, where financial regulators are carefully evaluating the role of crypto assets in their national financial strategies. Earlier this month, South Korea's financial regulator examined the Japanese Financial Services Agency’s legislative trend toward crypto assets as it considers lifting a ban on crypto exchange-traded funds in the country. This cautious approach by the Bank of Korea highlights the need for a balanced and risk-averse strategy in managing national financial reserves, ensuring stability and reliability in the face of volatile markets.