BOK flags stablecoin risks ahead of Circle president's visit

The Bank of Korea (BOK) has urged the National Assembly to regulate dollar stablecoins, warning their growing use poses a threat to the country’s monetary sovereignty and could weaken the effectiveness of monetary policy.

The warning came ahead of a visit to Seoul by Heath Tarbert, chief legal officer and president of Circle Internet Group, a US fintech firm that issues USDC.  

USDC is a popular stablecoin pegged to the US dollar, along with Tether (USDT), the largest stablecoin in terms of trading volume.

Tarbert is scheduled to meet with Korean lawmakers, as well as senior executives at banks and digital asset firms, this week, according to local media reports.

In a written statement submitted on Wednesday to Park Sung-hoon, a lawmaker of the opposition People Power Party, the BOK said that dollar-denominated digital coins could be used to circumvent foreign currency regulations.

In that regard, they could accelerate increase dollar outflows and heighten volatility in the foreign exchange market.

“The anonymity of public blockchain technology and their borderless nature would make it even more difficult to contain illegal transactions and manage foreign exchange flows.”

WON-BASED STABLECOINS

South Korea is actively considering regulations for won-based stablecoins in line with President Lee Jae Myung’s campaign pledges. The country may later extend them to dollar-denominated digital tokens.

The regulatory moves are aimed at preventing capital outflows and strengthening the won’s standing in the global digital finance.

Still, the BOK warned that won-denominated stablecoins would not be enough to absorb demand for dollar digital currencies.

It estimates the outstanding volume of won-based stablecoins is highly likely to exceed the reserves backing them, highlighting risks to the domestic financial system.

NON-BANKS’ DIGITAL COIN ISSUANCE

The BOK reiterated that digital currency issuance should be centered on banks and non-banks could participate in a bank-led consortium.

The remarks run counter to Democratic Party lawmaker Min Byung-deok’s proposal of three bills that would allow non-financial companies to issue won-based stablecoins beyond the BOK. 

CONTROL OF SUPPLY

The BOK also called for establishing a statutory policy council, involving the BOK, the finance ministry and the Financial Services Commission, to set rules on won-based stablecoins, including issuer licensing, issuance volume and reserve standards.

In particular, the central bank said its monetary policy committee should be granted authority to directly control the issuance of won stablecoins, while raising entry barriers to their primary market.

CENTRAL BANK DIGITAL CURRENCY

Meanwhile, the BOK is pushing to issue a central bank digital currency (CBDC) and have it coexist and compete with stablecoins.

To that end, it seeks revisions to the Bank of Korea Act to issue a wholesale CBDC, or a digital token for transactions among financial institutions, and build the related infrastructure,” the central bank said in the written statement.

Write to Yeonhee Kim at yhkim@hankyung.com
Yeonhee Kim edited this article.