South Korea Aims to Challenge USD Stablecoins with Blockchain-Driven VAT Refunds

NH NongHyup Bank, one of South Korea's five largest financial institutions, has launched a proof-of-concept (PoC) to digitize value-added tax (VAT) refunds for inbound tourists using stablecoin technology. The pilot, conducted in collaboration with Avalanche, Fireblocks, Mastercard, and Worldpay, aims to streamline the refund process through blockchain-driven automation and real-time settlements, as described in a BitcoinWorld article. This initiative aligns with South Korea's broader strategy to establish a domestic stablecoin market pegged to the Korean won (KRW), challenging the dominance of U.S. dollar-backed stablecoins, as reported by Phemex.

The PoC leverages Avalanche's blockchain to test smart contract-driven refund automation and stablecoin-based currency conversion. By eliminating delays in cross-border settlements, the system seeks to enhance efficiency for tourists, merchants, and financial institutions, as noted in the BitcoinWorld article. NH NongHyup emphasized that the trial does not involve real funds or customer data, focusing instead on technical feasibility and operational viability, as reported by BitcoinWorld. The bank reported that South Korea welcomed 16.37 million inbound tourists in 2024—a 48.4% increase from the prior year—highlighting the urgency to modernize the traditionally paper-based VAT refund process, as noted by BitcoinWorld.

The pilot's success could redefine cross-border payments, offering faster processing times, reduced administrative costs, and improved transparency. NH NongHyup's executive vice president, Choi Woon-jae, stated that the stablecoin-based model "demonstrates how blockchain can tangibly improve customer experience and strengthen national competitiveness," with plans to expand the system in compliance with upcoming regulatory guidelines, as noted in the BitcoinWorld article.

South Korea's stablecoin ambitions are gaining momentum as regulators draft rules to balance innovation and financial stability. The Financial Services Commission (FSC) is working to finalize KRW-pegged stablecoin regulations by year-end, which will prohibit yield-generating stablecoins and align with international standards, as reported by Phemex. Meanwhile, the Bank of Korea (BOK) has expressed concerns about allowing non-bank entities to issue stablecoins, advocating for restricted issuance to licensed banks to mitigate risks, as reported by Phemex. Despite these debates, major banks and tech firms, including KB, Shinhan, and Naver, are forming alliances to build infrastructure for won-backed stablecoins, as reported by Phemex.

The pilot reflects a broader trend of financial institutions embracing blockchain. NH NongHyup's project follows similar initiatives, such as Woori Financial Group's partnership with Samsung and its stake in BDACS, a KRW1 stablecoin issuer, as reported by Phemex. With domestic stablecoin transactions already surpassing $41 billion, South Korea aims to position itself as a global leader in digital currency innovation, as noted in the Phemex article.

As lawmakers accelerate regulatory frameworks, the government faces pressure to act swiftly to avoid falling behind international rivals like the U.S. and Japan. Legislators, including Min Byoung-dug, a supporter of President Lee Jae-myung's KRW-linked stablecoin agenda, argue that "the technology is ready, and the market is calling for it," emphasizing the need for rapid adoption, as reported by Phemex.

NH NongHyup's initiative underscores the growing convergence of traditional banking and blockchain solutions, potentially reshaping financial services for both domestic and international users.