Bank of Korea Warns of Financial Chaos from Won Stablecoins

The Bank of Korea (BOK) has expressed significant concerns regarding the issuance of won-denominated stablecoins by non-bank entities. Governor Lee Chang-yong voiced these apprehensions during a press conference following the BOK’s Monetary Policy Committee's decision to maintain the base interest rate at 2.50%.

The governor's primary concern is the potential for confusion and disruption in the financial system if multiple non-banking institutions are permitted to issue won-denominated stablecoins. He compared this scenario to the issuance of private currency in the 19th century, which led to widespread chaos. Governor Lee emphasized that such a situation would make it difficult to implement monetary policy effectively and could necessitate a return to the central banking system, which would be a complex and time-consuming process.

Additionally, the governor highlighted the potential clash between the issuance of won stablecoins and the foreign exchange liberalization policy. He noted that allowing non-banks to handle payment settlements could significantly alter their profit structures, further complicating the regulatory landscape. The BOK governor acknowledged that this issue is not one the central bank can decide on alone and that a direction cannot be determined until the heads of the relevant ministries have made their decisions.

The debate surrounding stablecoins in South Korea reflects ongoing tensions between the BOK's cautious approach and the political momentum under President Lee Jae-myung’s administration, which advocates for the legalization of won-based stablecoins. The BOK has historically preferred central bank digital currencies (CBDCs) or tokenized deposits over stablecoins, a stance that contrasts with the current political push for stablecoin legalization.

In response to the growing debate, South Korea’s ruling party proposed the Digital Asset Basic Act, which aims to regulate stablecoin issuance and enhance transparency in the crypto industry. However, this proposal has sparked debate about regulatory authority between the BOK and the Financial Services Commission (FSC). The BOK has decided to adopt a regulatory sandbox approach, allowing for the controlled experimentation of new financial products, including won-based stablecoins. This initiative involves a consortium of banks, fintech firms, and cryptocurrency exchanges, fostering collaboration across the financial ecosystem.

The BOK's concerns about stablecoins are rooted in the potential risks they pose to monetary policy and foreign exchange stability. The issuance of stablecoins by private entities could fragment the financial system, making it more challenging for the central bank to implement effective monetary policies. Additionally, the potential for stablecoins to be used for speculative purposes or to evade regulatory oversight adds another layer of complexity. The BOK's stance underscores the need for a comprehensive regulatory framework that balances innovation with financial stability.

The success of the banking consortium's efforts to launch won-denominated stablecoins will be a critical test of whether collaborative private sector efforts can coexist with central bank policies. The BOK's concerns highlight the importance of a coordinated approach between the public and private sectors to ensure that financial innovations do not compromise the stability of the monetary system. The BOK's warning comes at a time when central banks around the world are exploring the potential of digital currencies, serving as a reminder of the challenges and risks associated with such initiatives. The BOK's concerns about stablecoins underscore the need for a careful and measured approach to the development of digital currencies, ensuring that they do not undermine the stability of the financial system.