South Korea Considers Stablecoin Issuance Amid Capital Flight Concerns: Key Insights and Debates

South Korea is on the cusp of major developments in its stablecoin market, with the Bank of Korea (BOK) raising significant concerns over the risks associated with issuing a Korean won-pegged stablecoin. As the debate unfolds, discussions between cautious regulators and industry advocates highlight key issues surrounding capital outflows, foreign exchange management, and regulatory inclusivity.

South Korea's Central Bank Flags Risks of Capital Flight

The Bank of Korea, under Governor Rhee Chang-yong, has emphasized the potential risks posed by a Korean won-pegged stablecoin, particularly in terms of capital outflows. During a parliamentary audit by the National Assembly's Strategy and Finance Committee on the 29th, Rhee warned about the possibility of Korean won-backed stablecoins being used abroad, potentially bypassing foreign exchange regulations.

Rhee stated, "Many would take the Korean won-backed stablecoin abroad, which is deeply concerning." He suggested a phased issuance strategy beginning exclusively with banks. According to Rhee, this approach would allow authorities to monitor foreign exchange flows while minimizing risks. "It is crucial to begin issuance through banks, monitor and control foreign exchange outflows effectively, and then expand further when there is more certainty," he stated.

Rhee highlighted additional concerns, asserting that won-pegged stablecoins could create avenues to sidestep exchange controls. "From the perspective of authorities managing foreign exchange, this is greatly worrisome. There's a large possibility that the creation of a Korean won stablecoin could be used to bypass foreign exchange regulations."

The governor also refuted claims that a Korean won stablecoin could reduce dependence on dollar-based stablecoins. Countering positions held by Democratic Party lawmaker Ahn Do-geol, Rhee remarked, "I don't believe a Korean won stablecoin would reduce demand for dollar-based stablecoins. People use dollar stablecoins as a vehicle to shift assets into the U.S. dollar.” This highlighted the enduring dominance of dollar-pegged stablecoins in global markets.

While acknowledging that concerns over dollar stablecoins dominating South Korea’s won settlement market may not yet be urgent, Rhee stressed the importance of establishing robust regulatory frameworks. “Efforts must be made to establish effective regulatory measures as their usage could grow significantly,” he noted.

Industry Advocates Seek Unified Standards and Inclusivity

The Bank of Korea's inclination towards issuing stablecoins only through banks has sparked objections from industry experts advocating for inclusivity. Koh Sang-min, chairman of the Kaia DLT Foundation, expressed his disagreement during comments reported by Cointelegraph. "Issuance should not be limited to banks alone. Non-banking institutions must also be allowed to participate under clear and robust standards," Koh remarked.

While acknowledging the central bank’s concerns about risks tied to stablecoin usage, Koh criticized the exclusive issuance model for banks, describing it as "lacking logical foundation." He argued for the necessity of a unified regulatory framework to ensure that all qualified entities, both banks and non-banking institutions, have equal opportunities to participate in the stablecoin market.

Koh further elaborated, stating, "If the central bank provides credible issuer requirements and risk mitigation guidelines, both market stability and innovation can be achieved simultaneously." He also warned against excessive restrictions that could impede stablecoin adoption and overall market growth.

Koh cautioned regulators against banning all stablecoin-related activities that generate additional income. While agreeing that incorporating interest payment mechanisms within stablecoins is unsuitable, Koh argued that blocking utility-driven profit opportunities could harm adoption rates and stifle innovation. He remarked, "Including an interest payment mechanism within the stablecoin itself is inappropriate. However, completely banning activities leveraging stablecoins for auxiliary profits is excessive and may stifle market growth."

Progressively Structured Issuance Plans and Legislative Developments

Despite ongoing debates, South Korea is making tangible progress toward stablecoin issuance. Reports reveal that eight major domestic banks are preparing to launch Korean won-pegged stablecoins, with rollouts expected to begin in incremental phases by late 2023 or early 2024.

In addition to banks, private players such as Naver Financial are entering the stablecoin space. Naver is reportedly acquiring Dunamu, the operator of the cryptocurrency exchange Upbit. The acquisition serves as a strategic move, enabling Naver to launch a stablecoin project tied to the Korean won.

The election of President Lee Jae-myung has further accelerated legislative changes aimed at establishing a comprehensive digital asset framework, including specific regulations for stablecoins. Industry observers believe the evolving legal landscape will play a pivotal role in shaping South Korea's competitive stablecoin ecosystem.

A Nation Poised for Stablecoin Innovation

As South Korea gears up to enter the stablecoin market, discussions between regulatory authorities and industry advocates continue to shape the nation's trajectory. The central bank’s cautious stance highlights the importance of managing risks tied to capital flight and foreign exchange regulations, while industry proponents argue for regulatory inclusivity to foster innovation and competition.

The gradual rollout of Korean won-pegged stablecoins, combined with strengthened legislative frameworks, positions South Korea as a rising player in the stablecoin sector. The success of this initiative will depend on striking a careful balance between regulatory oversight and fostering vibrant market innovation, ensuring stability without compromising growth opportunities.