South Korea Regulates Won-Backed Stablecoins to Mitigate Systemic Risks in Policy Shift

South Korea is advancing legislation to regulate won-backed stablecoins, a move aimed at fostering digital economic growth while mitigating systemic risks. Democratic Party lawmakers, including Ahn Deok-gil and Min Byung-deok, are spearheading the initiative under President Lee Jae-myung’s endorsement, marking a significant policy shift. The proposed framework mandates that stablecoins be issued exclusively by financial institutions meeting strict criteria, including a minimum capital requirement of 5 billion won. This effort aligns with the president’s campaign pledges and is led by Kim Yong-beom, the chief policy aide and blockchain expert, underscoring the government’s commitment to embedding the won into digital finance [2].

The legislation seeks to counter dollar dominance in stablecoins and prevent the marginalization of the Korean won in decentralized finance (DeFi) platforms. By requiring stablecoins to be fully backed by reserves, the bill aims to ensure stability while addressing risks such as de-pegging events, as seen in past crises like TerraUSD’s collapse [3]. Prohibiting interest-paying stablecoins is a key measure to avoid distortions in monetary policy and competition with traditional banking systems. However, critics, including the opposition People Power Party (PPP), have yet to align with these measures, highlighting political divides over regulatory priorities [1].

The Bank of Korea (BOK) labor union has raised concerns about stablecoins evolving into a "shadow banking" system. Union leader Kang Young-dae emphasized risks including IT vulnerabilities, reserve asset volatility, and operational failures, which could trigger "runs on the coin" and destabilize the broader economy. These warnings echo global concerns, with the BOK joining central banks like the U.S. Federal Reserve and the European Central Bank in scrutinizing stablecoin infrastructure [3].

South Korea’s approach mirrors global regulatory trends, including the U.S. House’s stablecoin framework and the EU’s Markets in Crypto-Assets (MiCA) regulations. By prioritizing transparency and reserve backing, the DP’s bill positions the country to navigate the transition toward digital finance cautiously. Ahn Deok-gil, a key architect of the legislation, argued that stablecoins are no longer experimental but critical to monetary sovereignty, drawing parallels to the U.S. digital dollar initiative.

Analysts note that the DP’s cautious stance reflects a balance between innovation and stability. While the prohibition of interest-paying stablecoins may curb market distortions, some fear it could stifle digital asset innovation compared to global competitors like China and the U.S. The PPP’s undecided position leaves room for future adjustments, though the DP’s framework already signals a commitment to aligning with international standards.

The BOK union’s warnings highlight the tension between technological advancement and regulatory oversight. Stablecoins offer benefits such as faster cross-border transactions but lack deposit insurance and liquidity safeguards, creating systemic risks. Calls for harmonized global standards are growing, as cross-border challenges intensify. South Korea’s legislation could influence global crypto regulations, particularly as central banks explore their own digital currencies.

By prioritizing risk mitigation, the DP aims to foster trust in digital assets while safeguarding economic stability. The success of the framework will depend on its implementation and adaptability to evolving market dynamics. As the global digital finance landscape shifts, South Korea’s legislative efforts position it to play a pivotal role in shaping the future of stablecoins [1][2][3].

Sources:

[1] title1 (https://www.dimsumdaily.hk/south-koreas-ruling-and-opposition-parties-propose-stablecoin-bills-following-debate-over-interest-payments/)

[2] title2 (https://www.chosun.com/english/national-en/2025/07/29/WZF6UDAO4NFLHL5T2HXROA3H6I/)

[3] title3 (https://bitcoinworld.co.in/bank-korea-stablecoins-risks/)