South Korea's Central Bank Proposes Cautious Stablecoin Issuance by Regulated Banks

South Korea's central bank, the Bank of Korea (BOK), has proposed a cautious approach to the issuance of stablecoins, suggesting that regulated banks should be the first entities allowed to issue these digital assets. This proposal comes as the country experiences significant growth in digital asset trading and concerns over capital outflows.

Deputy Governor Ryoo Sang-dai of the BOK emphasized the importance of starting with banks due to their higher levels of financial regulation. This approach aims to establish a safety net, considering the potential for market disruption or consumer harm. The BOK's stance is part of a broader effort to integrate stablecoins into the financial system while minimizing risks.

The BOK's proposal is driven by several key factors. Firstly, the central bank seeks to protect its monetary policy by ensuring that stablecoins do not undermine the effectiveness of traditional monetary tools. Secondly, the BOK aims to prevent the misuse of stablecoins for illicit activities, such as money laundering and terrorist financing. By regulating the issuance of won-based stablecoins, the central bank can monitor and control the flow of funds, thereby reducing the risk of financial crimes.

The approach also addresses regulatory concerns surrounding stablecoins. By involving regulated commercial banks in the issuance and management of stablecoins, the central bank can ensure that these digital assets are subject to the same regulatory oversight as traditional financial instruments. This not only enhances the credibility of stablecoins but also fosters public trust in the new financial technology.

Ryoo Sang-dai highlighted the potential impact of stablecoins on monetary policy and financial stability. The central bank's proposal involves a systematic evaluation of stablecoin designs and their associated risks. By mapping historical failure modes, the BOK aims to create a robust framework that can mitigate potential risks and ensure the stability of the financial system. This approach aligns with the broader global trend of central banks exploring the potential of stablecoins while maintaining a cautious stance.

Governor Rhee Chang-yong of the BOK has also expressed support for stablecoins, acknowledging their potential while urging caution. He emphasized the need to closely examine their potential impacts on foreign exchange management. President Lee Jae-myung's administration has made stablecoin regulation a priority, introducing the Digital Asset Basic Act, which would allow domestic companies with at least $366,749 in capital to issue won-backed stablecoins.

The BOK is also exploring a hybrid model where its planned deposit tokens could coexist with private-sector stablecoins on public blockchains. However, some industry experts remain skeptical about the effectiveness of this approach in protecting monetary sovereignty. Despite these concerns, the BOK's measured and regulated approach to stablecoins is a significant development in the country's financial landscape, aiming to protect its monetary policy, prevent financial crimes, and foster public trust in the new financial technology.