Bank of Korea Union Warns Won-Pegged Stablecoins Pose Systemic Risk

The Bank of Korea (BOK) labor union has issued a stark warning about the risks associated with Korean won-pegged stablecoins, labeling them a potential source of systemic financial instability. The union, led by Kang Young-dae, raised alarms over the growing adoption of stablecoins, arguing that they resemble a new form of "shadow banking" by attracting funds without offering interest to holders while masquerading as secure assets [1]. The concerns extend beyond theoretical risks, as the union highlighted vulnerabilities including IT failures, market volatility of reserve assets, credit risks tied to issuers, and operational mismanagement. Kang emphasized that a loss of public trust could trigger a "run on the coin," forcing issuers to rapidly liquidate underlying reserves—such as government bonds—which could destabilize both consumers and the broader economy [1].

The union’s critique centers on stablecoins’ ability to operate outside traditional banking regulations, which typically safeguard depositors through oversight mechanisms like capital requirements and deposit insurance. Kang’s warnings echo global regulatory anxieties, particularly following the collapse of algorithmic stablecoin TerraUSD (UST) in 2022, which exposed the fragility of stablecoin designs reliant on complex algorithms rather than transparent reserves [1]. The BOK union specifically targets fiat-backed stablecoins, where reserves such as government bonds or commercial paper could lose value if market conditions deteriorate. This scenario, combined with operational failures or cyberattacks on the technological infrastructure underpinning stablecoins, could exacerbate financial contagion risks.

The global regulatory landscape for stablecoins reflects a growing consensus on the need for stringent oversight. The European Union’s Markets in Crypto-Assets (MiCA) framework, for instance, mandates strict reserve management and transparency rules for stablecoin issuers. Similarly, Japan’s 2022 legislation requires stablecoins to be issued by licensed banks and fully backed by legal tender. In the U.S., regulatory proposals aim to classify stablecoin issuers as insured depository institutions to align them with traditional banking standards. These measures underscore the BOK union’s stance that stablecoins, particularly those intended for mass adoption, require robust governance akin to conventional financial instruments to prevent systemic shocks [1].

The debate over stablecoins hinges on balancing innovation with stability. Proponents argue they offer faster, cheaper cross-border payments, financial inclusion for unbanked populations, and foundational support for decentralized finance (DeFi) ecosystems. However, the BOK union contends that the benefits come with significant trade-offs. By operating outside prudential regulations, stablecoins risk replicating the vulnerabilities that led to crises in traditional banking, such as liquidity shortages and panic-driven asset sales. The union’s call for caution aligns with global efforts to mitigate risks while preserving the transformative potential of digital assets.

Central banks, including the BOK, are also exploring alternatives to private stablecoins, such as Central Bank Digital Currencies (CBDCs). A CBDC would offer the same stability as fiat currency but with the efficiency of digital transactions, potentially reducing reliance on private stablecoins. However, CBDCs raise questions about privacy and centralization, which could limit their adoption in certain use cases. For now, the BOK union’s warning serves as a critical reminder that unregulated stablecoin proliferation risks undermining the very financial systems they aim to complement [1].

The implications of the union’s stance are far-reaching. For users and businesses, the message is clear: stablecoins vary significantly in risk profiles. Those issued by transparent entities with robust reserve management and regulatory compliance are likely safer. However, the absence of universal standards leaves room for instability, particularly in markets where oversight remains fragmented. As the BOK union’s concerns gain traction, they may influence broader regulatory reforms, shaping how stablecoins integrate into Korea’s financial infrastructure—and by extension, the global digital economy [1].

Source: [1] [Urgent Warning: Bank of Korea Stablecoins Deemed Perilous by Union] [https://coinmarketcap.com/community/articles/6887249a2477c254f74c0cf2/]