South Korea Lifts 14-Year Kimchi Bond Ban to Boost FX Liquidity

South Korea has lifted a 14-year ban on local institutions investing in foreign currency-denominated bonds issued for domestic use, known as kimchi bonds. This decision comes in response to significant capital outflows and a surge in demand for dollar-backed stablecoins, which have strained dollar reserves and exacerbated foreign exchange imbalances.

The Bank of Korea announced on Monday that banks, securities firms, and insurers involved in foreign exchange operations can now freely invest in kimchi bonds. These instruments, which are issued in South Korea but denominated in currencies like the US dollar, had been restricted since 2011 to curb short-term external liabilities and prevent regulatory loopholes.

The move is aimed at boosting foreign exchange liquidity and easing downward pressure on the won. With South Koreans pouring nearly $42 billion into overseas stocks and stablecoins in the first quarter of 2025 alone, the government is adjusting its policies to address these challenges. The resulting strain on dollar reserves and growing FX imbalance have forced officials to rethink earlier controls.

“We expect the measure to help alleviate the imbalance in foreign exchange supply and demand by improving foreign currency liquidity and easing downward pressure on the Korean won,” a central bank official stated.

In addition to stabilizing the foreign exchange market, authorities hope that the change will revitalize the kimchi bond market and support capital formation domestically. However, privately placed kimchi bonds will remain off-limits to prevent misuse of the system.

The easing of restrictions on kimchi bonds is part of a broader reform push aimed at stabilizing the foreign exchange market and supporting Seoul’s goal of becoming a regional financial hub. In recent months, authorities have loosened hedging limits, relaxed rules on foreign currency lending, and expanded a dollar swap line with the National Pension Service.

The shift in policy reflects deeper changes taking place in the digital finance landscape. Earlier this month, the central bank paused its pilot project for a national digital currency, as stablecoins increasingly take center stage in South Korea’s financial strategy. The delay signals caution, even as President Lee Jae-myung pushes to broaden access to stablecoin issuance.

Together, the revival of kimchi bonds and the rethinking of CBDC plans reflect a recalibrated approach, one aimed at keeping pace with fast-changing market forces while maintaining financial stability.