South Korea Challenges USD Dominance with Homegrown Stablecoin Pilot

South Korea's NH NongHyup Bank has launched a pilot program to streamline value-added tax (VAT) refunds for inbound tourists using stablecoins, marking a significant step in the country's broader push to digitize financial services. The initiative, conducted in collaboration with blockchain platforms Avalanche, Fireblocks, Mastercard, and Worldpay, aims to automate refund processes and enable real-time settlements through stablecoin technology, as reported in a The Block article. This proof-of-concept (PoC) does not involve real funds or customer data but focuses on validating technical feasibility and operational efficiency, according to the bank's press release.

The project targets a growing tourism sector, with South Korea welcoming 16.37 million inbound visitors in 2024—a 48.4% increase from the prior year, as noted in a The Block report. NH NongHyup's VAT refund system allows foreign tourists to reclaim 10% of the tax paid on eligible purchases when leaving the country. By digitizing this traditionally paper-based process, the bank aims to enhance convenience for both tourists and businesses while reducing administrative costs, as reported in the The Block article.

The PoC leverages Avalanche's blockchain to test smart contract-driven automation and stablecoin-based currency exchange, which could eliminate delays in cross-border settlements, as detailed in the The Block report.

The move aligns with South Korea's national strategy to develop a Korean won (KRW)-pegged stablecoin market, a response to the dominance of U.S. dollar-backed stablecoins like Tether (USDT) and Circle's USDC. Financial regulators and lawmakers are finalizing a stablecoin bill by year-end to establish issuance rules and prohibit yield-earning stablecoins, mirroring U.S. restrictions under the GENIUS Act, as noted in a Blockonomi analysis. Meanwhile, major banks and tech firms are forging partnerships to build infrastructure for stablecoin projects. KB, Shinhan, Hana, and Woori Financial Groups have allied with tech giants like Naver, Kakao, and Samsung to develop systems for issuing and managing won-pegged stablecoins, as reported in a Crypto.News piece.

Despite enthusiasm, regulatory debates persist. The Bank of Korea (BOK) has expressed concerns that allowing private entities to issue stablecoins could undermine financial stability and monetary policy. BOK officials argue that only regulated banks should hold issuance rights, while industry players advocate for broader participation to foster innovation, as noted in a The Block article. The Financial Services Commission (FSC) has emphasized the need to balance risk mitigation with global competitiveness, urging alignment with international standards as the U.S. and Japan advance their own stablecoin frameworks, as reported in a DL News report.

NH NongHyup's pilot reflects a broader trend: South Korea's financial sector is racing to position itself as a leader in digital currency innovation. With domestic stablecoin transaction volumes already exceeding $41 billion, banks are prioritizing partnerships to accelerate adoption, as noted in a Crypto.News article. Woori Financial Group, for instance, has expanded its collaboration with Samsung Electronics and holds a stake in BDACS, a firm that issued the KRW1 stablecoin in a 2024 PoC, as reported in a Blockonomi analysis.

As regulators draft legislation, the government faces pressure to act swiftly. Critics argue that delays risk ceding ground to global competitors, particularly as the U.S. and Japan fast-track stablecoin initiatives. "The technology is ready, and the market demands it," said lawmaker Min Byoung-dug, a key ally of President Lee Jae-myung, who has made KRW-pegged stablecoins a policy priority, as reported in a DL News report.