S.Korea's stablecoin frenzy fuels stock rally despite regulatory uncertainty

A wave of speculative fervor surrounding won-based stablecoins is sweeping South Korea’s equity markets, with nearly half of the top 30 performing stocks since the inauguration of President Lee Jae-myung tied to the nascent digital asset theme, even before a formal policy framework has been unveiled.

An analysis by the Korea Economic Daily of stock performance from June 2, just a couple of days before Lee took office, through June 24 found that 13 of the 30 biggest gainers on the Kospi and Kosdaq were stocks linked to the idea of a Korean won stablecoin.

Investors have been aggressively piling into companies seen as potential beneficiaries of future regulatory moves, despite no official government endorsement or legal clarity, the analysis showed.

The most dramatic case is ME2ON Co., a gaming company, shares of which surged 289.3% in just three weeks, topping the market-wide performance chart.

Listed on the Kosdaq market, shares of ME2ON were recently trading at 7,280 won, up sharply from 1,877 won on June 2.

Its stock was halted on Monday after the steep climb, only to jump another 9.8% when trading resumed on Tuesday.

Analysts attributed the surge to the company’s subsidiary, which recently launched a dollar-pegged stablecoin for casino games, prompting speculative bets on its potential to tap into the won-pegged coin boom.

KAKAO PAY

Kakao Pay Corp., the digital payments unit of tech giant Kakao Corp., has also rebounded strongly, climbing 143.1% over the same period and surpassing its IPO price of 90,000 won for the first time in years.

Despite being designated as an investment warning stock by the Korea Exchange on June 20, the stock spiked another 46.3% over the past three sessions, triggering a trading suspension on Tuesday.

Market participants increasingly view Kakao Pay as a flagship player in a future won-backed stablecoin ecosystem.

Yet the speculative rally has raised alarm bells across regulatory and industry circles.

“The market is running on pure expectations rather than fundamentals,” said a senior fintech executive. “In many cases, these companies lack any real technological capacity or infrastructure for stablecoins, but retail investors are buying aggressively nonetheless.”

RULING PARTY MOVES TO LOWER BARS

At the heart of the market optimism is a legislative proposal from the ruling Democratic Party (DP) that would allow firms with as little as 1 billion won ($733,891) in equity capital to issue stablecoins – a move critics warn could open the floodgates to poorly capitalized players and systemic risks.

The bill, dubbed the “Digital Asset Innovation Act,” is expected to be tabled in July by DP lawmaker Kang Joon-hyun, who serves on the National Assembly’s policy committee.

The bill defines value-stable digital assets and sets out minimal criteria for stablecoin issuance, including a 10 billion won equity threshold.

While the bill represents a doubling of the 5 billion won threshold proposed in a competing bill by another DP lawmaker, Min Byung-deok, it still falls well short of standards seen in other sectors.

In contrast, Korea’s Electronic Financial Transactions Act requires 50 billion won in capital for a licensed electronic financial firm and 20 billion won for prepaid payment providers.

The relatively low bar has raised red flags across the financial community, particularly given the precedent of past collapses.

A recent payment default involving Happymoney INC, a prepaid gift card issuer with 25 billion won in capital, following the TMON and WeMakePrice incident, highlighted the fragility of loosely regulated operators.

“Allowing firms with only 10 billion won to issue stablecoins could mean anyone with moderate financing can enter a market that could attract massive deposits,” said a payments industry official. “At the very least, regulatory requirements should match those for digital payments companies, including capital reserves, internal controls and segregated custody.”

A senior official at Korea’s financial regulator, the Financial Services Commission, said that the bill is still under review.

“Capital adequacy and consumer protection standards will be a key part of the next parliamentary debate,” said the official.

EIGHT BANKS MOVE TO LAUNCH JOINT STABLECOIN ENTITY

In a related move, Korea’s eight leading banks are joining forces to establish a joint venture to issue a won-backed stablecoin, in a defensive play to retain control over the digital payment infrastructure.

According to a statement issued by the Korea Federation of Banks (KFB) on Monday, KB Kookmin, Shinhan, Woori, Nonghyup, Industrial Bank of Korea (IBK), Suhyup, iM Bank and K Bank have formed a working group to explore the formation of a consortium.

The group plans to create a jointly owned legal entity that would issue a stablecoin with reserves held in custody or trust at member banks.

The banks aim to structure the initiative within the confines of Korea’s Banking Act, which limits equity stakes in non-financial firms to 15%.

The planned coin would allow banks to maintain their role in settlement and payment services, which are increasingly challenged by dollar-based stablecoins and domestic fintech startups.

Still, debate is intensifying over who should be allowed to issue won-based stablecoins – only banks, or also tech firms, startups, and non-bank issuers.

Last month, Bank of Korea Governor Rhee Chang-yong said that the uncontrolled issuance of won-pegged stablecoins by non-bank entities could significantly undermine the effectiveness of monetary policy.

Rhee argued that issuance should begin within the banking sector, where regulatory oversight is feasible. His remarks come amid rising global debate over whether stablecoins should be limited to banks or opened to fintech and non-bank issuers.

Write to Jin-Seong Kim, Mi-Hyun Jo and Eui-Jin Jeong at jskim1028@hankyung.com

In-Soo Nam edited this article.