South Korea Moves to Address Stablecoin Regulation, Tackling Market Volatility and Economic Risks

As South Korea concludes the Chuseok holiday, its political focus pivots toward addressing stablecoin regulation—a critical issue for its financial and digital asset markets. Parliament is set to examine stablecoin frameworks, exploring issuer responsibilities, oversight mechanisms, and foreign exchange management systems. With South Korea positioning itself as an emerging center for digital asset advancement, resolving these regulatory gaps has never been more urgent.

Parliamentary Hearings Set to Shape Stablecoin Landscape

According to industry insiders, South Korea's National Assembly Political Affairs Committee will commence financial oversight hearings later this month. Proceedings will include the Financial Services Commission on October 20, the Financial Supervisory Service on October 21, and a culminating review on October 27. These discussions aim to chart the regulatory course for Korean-won-based stablecoins, establish licensing requirements, strengthen financial stability measures, and address monetary policy implications tied to digital assets.

Recent market instability, including cases of de-pegging where stablecoins lose their pegged value, has underscored these discussions' urgency. De-pegging not only erodes confidence in stablecoins as mediums of exchange but also signals systemic vulnerabilities.

Shrinking Domestic Stablecoin Market Draws Concern

South Korea's domestic stablecoin market is in sharp decline. Data presented by the Financial Supervisory Service to Assemblyman Chu Kyung-ho highlighted a staggering 80% drop in daily stablecoin trading volume, falling to just 2 trillion won as of June 2023. Such contraction comes amid weaker investor sentiment, compounded by global financial market adjustments and slowing growth in the digital asset sector.

Furthermore, South Korea’s overall digital asset market size shrank by 27% within six months, dropping from 121.8 trillion won in January to 89.2 trillion won in June. This downturn reflects changing economic priorities, with President Lee Jae-myung's "KOSPI 5000" campaign steering investor focus toward domestic stock markets. Recent surveys, like one conducted by Samsung Securities among high-net-worth individuals, reveal that a significant 71% now favor domestic equities for investment, relegating digital assets to only 12% of intended allocations.

Dollar-Backed Stablecoins Surge Amid Growing Offshore Dependency

While the domestic stablecoin market struggles, dollar-backed stablecoins have seen explosive growth in South Korea. Holdings of such stablecoins at local cryptocurrency exchanges more than doubled year-over-year, reaching $365.41 million by June 2023. However, this figure likely underestimates their actual presence in the market, as private holdings remain unaccounted for.

The rise in dollar-stablecoin usage stems from the prohibition of domestically issued stablecoins, with all locally traded variants originating from foreign issuers. This reliance on internationally issued stablecoins raises concerns over unauthorized capital outflows. Data highlights a dramatic rise in cross-border capital flows via stablecoins, which jumped from 1 trillion won in January 2022 to 12 trillion won by November 2022, before stabilizing at an average of 6 trillion won in the first half of 2023.

These trends spotlight the risks posed by inadequate foreign exchange supervision. Jung Doo Lee, a Senior Research Fellow at the Korea Institute of Finance, emphasized, "Current foreign exchange monitoring systems are insufficient to track dollar-backed stablecoin activity, which could become a major avenue for capital flight."

De-Pegging Risks Shake Market Confidence in Stablecoins

Stablecoin de-pegging incidents have added fuel to ongoing regulatory debates. Over the weekend, global digital markets faced a sharp downturn, liquidating $20 billion in positions. Key stablecoins experienced price instability, including Tether (USDT), which traded at 5,755 won on South Korea’s Bithumb exchange—far above its standard parity. Similarly, Binance reported Athena Stablecoin (USDe) dipping to just $0.65, a notable deviation from its peg.

These de-pegging events highlight systemic risks. Stablecoins are widely lauded for their utility as a medium of exchange and payment method, yet price deviations can severely undermine their reliability and trustworthiness. The Korea Deposit Insurance Corporation warns that measures enabling users to directly redeem stablecoins from issuers could mitigate such risks. However, they also stress the need for safeguards to prevent liquidity runs.

Jung Doo Lee echoed these sentiments, advocating for comprehensive stablecoin regulation: “Formalized frameworks must integrate robust foreign exchange monitoring systems, while addressing capital inflows and outflows to maintain financial stability.”

Building a Path Forward: Innovation and Stability in Balance

South Korea finds itself at a crossroads as it seeks to reconcile the rapid evolution of digital assets with the need for regulatory oversight. The convergence of shrinking domestic market activity, growing foreign dependence, rising de-pegging risks, and capital outflow challenges paints a complex regulatory landscape.

The upcoming parliamentary hearings offer a critical opportunity to craft a regulatory framework that minimizes systemic risks while fostering innovation. As South Korea moves to address these concerns, its approach will likely serve as a blueprint for nations navigating similar digital asset challenges, ultimately shaping the future of global stablecoin markets.