Bank of Korea’s Role in Korean Won Stablecoin Regulation: Key Insights from Governor Rhee

South Korea’s central bank, the Bank of Korea (BOK), is taking a decisive stance on its role in the regulation and management of stablecoins denominated in the Korean won. According to Governor Rhee Chang-yong, the institutional involvement of the BOK is critical in maintaining stable monetary policy amidst the rising adoption of stablecoins. Speaking during a parliamentary audit session at the National Assembly's Strategy and Finance Committee on October 20, Rhee underscored the multifaceted impact of stablecoins on monetary systems and economic stability.

Stablecoin Oversight and Monetary Policy Interdependence

Governor Rhee emphasized the need for clearer delineation of the BOK's participation in regulating stablecoin issuance, highlighting how stablecoins directly influence monetary policy. Currently, South Korea’s Financial Services Commission oversees stablecoins, but Rhee argued that the central bank must play an active role.

“Stablecoins, being intrinsically linked to monetary policy, require the central bank's deep involvement in their framework,” he said, referencing the U.S. “Genius Act” as an exemplary model. This legislation ensures central bank input through unanimous decision-making regarding stablecoin-related decisions. Since stablecoins intersect monetary policy and financial innovation, Rhee advocated for regulatory provisions that prioritize central bank leadership in system design.

The Need for Capital and Forex Regulation Overhaul

Rhee also warned that Korean won-denominated stablecoins would necessitate fundamental reforms in capital transaction and foreign exchange regulations. South Korea’s capital markets still operate under strict control, including restrictions on residents’ overseas asset holdings. Naturally, allowing stablecoins to operate under these conditions would disrupt existing frameworks.

“If won-based stablecoins are legalized, South Korea must reconsider and restructure its approach to capital transactions and foreign exchange systems,” Rhee explained. Such changes would be pivotal in ensuring regulatory and economic coherence amidst the transition toward a stablecoin-integrated financial ecosystem.

Risks of Stablecoin Issuance by Non-Bank Entities

The governor raised strong reservations about permitting non-bank entities to issue stablecoins, as this could present significant systemic risks. Such a scenario, Rhee warned, might lead to indirect banking licenses being issued to entities focused solely on payments and settlements, weakening the clear separation between industrial and banking functions within South Korea’s financial system.

“The unrestricted issuance of stablecoins by non-bank entities could open loopholes for circumventing capital controls and foreign exchange regulations,” Rhee cautioned. Mismanaged stablecoins might further enable unregulated capital flows, threatening economic stability and amplifying vulnerabilities across the financial landscape.

Addressing Market Stress Vulnerabilities of Stablecoins

Rhee highlighted the heightened susceptibility of stablecoins to market stress and systemic financial risks. Despite their name, stablecoins remain outside protections provided by deposit insurance systems or central bank liquidity support. This makes them prone to risks like massive redemptions during crises, termed “coin runs,” which could spill over into traditional financial markets.

“In times of market turbulence, stablecoins could catalyze financial instability without proper safeguards,” Rhee said. To mitigate these risks, he proposed the development of alternative instruments such as deposit tokens—bank-issued digital assets designed with strong regulatory oversight.

By adopting a dual approach of stablecoin regulation and parallel alternative instruments, the BOK aims to hedge against these vulnerabilities while reinforcing trust in bank-issued innovations.

Core Regulatory Principles for Stablecoins

The BOK has outlined several fundamental principles to establish a comprehensive and secure regulatory structure for Korean won-denominated stablecoins. These principles are aimed at ensuring stability, transparency, and alignment with the broader goals of monetary and financial stability. The key elements include:

• Issuing stablecoins under a consortium led by banks to ensure accountability.
• Enforcing bank-level capital adequacy and prudential regulatory standards on issuers.
• Prohibiting interest payments on stablecoins to prevent speculation and instability.
• Requiring a specified proportion of reserves to be maintained in cash.
• Mandating that reserve assets be held securely with the Bank of Korea.

These measures reflect the central bank’s commitment to both fostering financial innovation and safeguarding systemic and monetary stability.

Balancing Financial Innovation and Stability

Concluding his address, Governor Rhee reaffirmed the BOK’s focus on achieving a balance between enabling financial innovation and preserving economic stability. He emphasized the necessity for regulatory frameworks to incorporate robust institutional safeguards that maintain monetary sovereignty, stabilize foreign exchange markets, and mitigate systemic risks.

“To create a sustainable foundation for stablecoins, regulatory measures must bolster both innovation and stability, ensuring long-term growth for South Korea’s financial system,” he stated.

Through these reforms and efforts to establish a secure, well-governed stablecoin framework, the Bank of Korea aims to adapt to the shifting financial landscape while maintaining its essential role as a steward of economic stability.