Stablecoin Market Faces Challenges of Depegging and Money Laundering Risks

The stablecoin market is encountering two pressing issues: depegging from their intended value and increasing misuse for money laundering activities. These challenges have sparked global scrutiny, with South Korea's National Assembly expected to bring attention to regulatory gaps during its ongoing annual audit.

Growing Concerns Over Stablecoin Misuse in Criminal Activities

Recent events have highlighted the vulnerabilities of stablecoins as tools for illicit activities. Notably, a series of abduction and disappearance cases in Cambodia uncovered their use in money laundering schemes. On October 19, the National Assembly announced plans to interrogate the Financial Services Commission (FSC) regarding its oversight of Korean won-pegged stablecoins and the broader legislative framework surrounding digital assets.

Investigations revealed that criminal organizations in Cambodia demanded digital assets, including stablecoins, as ransom payments from victims’ families. These transactions were conducted either directly or through intermediaries for easier fund transfers. Groups involved in romance scams reportedly laundered stolen funds by converting them into stablecoins, charging a 10% commission, and relying on South Korean crime syndicates to transfer the money overseas.

Attorney Hong Pooreun from Descent Law Firm addressed South Korea's jurisdictional stance, noting, “Under Article 2 of the Criminal Act's territorial principle, foreigners committing crimes in Korea may be prosecuted.” She further elaborated, “Article 7 allows legal action against foreign nationals found guilty of crimes targeting Korean citizens.”

Challenges of Monitoring Stablecoin Transactions and Potential Legislative Remedies

Industry experts have raised concerns over the tracking of stablecoin transactions, emphasizing their structural compatibility with criminal exploitation. The Korea Capital Market Institute underscores the challenges posed by peer-to-peer (P2P) stablecoin transactions, which remain largely untraceable due to their inherent anonymity and decentralized nature. This opacity enables activities such as money laundering, tax evasion, and unregulated cross-border remittances.

In light of these challenges, the Institute advocates for a comprehensive overhaul of anti-money laundering (AML) and foreign exchange transaction regulations. Key recommendations include incorporating stablecoins within the scope of the Act on Reporting and Using Specified Financial Transaction Information (Specific Financial Information Act) alongside the Foreign Exchange Transactions Act. Such integration would bolster Know-Your-Customer (KYC) protocols and enforce stringent financial transaction reporting standards.

Attorney Hong also emphasized the difficulty faced by financial institutions in detecting illicit activities immediately. She stated, “When cryptocurrency intermediaries handle stolen funds and transfer them through multiple accounts, real-time detection becomes nearly impossible.” Hong proposed legislative amendments to empower financial institutions to proactively freeze accounts receiving high-volume deposits within short periods, even in the absence of formal suspicious activity reports.

Depegging Issues Affect Stablecoin Trust and Calls for Stronger Investor Protections

Beyond criminal exploitation, stablecoins have also struggled to maintain their appeal as safe financial instruments amid recurring depegging incidents. Over KRW 27 trillion in forced liquidations have shaken market sentiment and strained trust in stablecoin reliability.

Prominent examples include Tether (USDT), which saw its price spike to KRW 5,755 on Bithumb—well above its intended $1 peg. Similar price fluctuations occurred with USD1 and USDe across platforms like Upbit and Binance. Compensation measures were subsequently launched by Bithumb and Binance to address losses incurred by affected investors.

In a bid to restore market confidence, the Korea Deposit Insurance Corporation proposed implementing robust redemption mechanisms based on international standards. For instance, the European Union’s Markets in Crypto-Assets (MiCA) regulation and the United States’ GENIUS Act enable stablecoin holders to directly redeem their assets from issuers, mitigating risks and safeguarding investments. By adopting similar frameworks, South Korea could enhance investor protections and ensure greater stability within the market.

Increasing Global Scrutiny and South Korea’s Regulatory Response

With stablecoins facing mounting global scrutiny, regulators and financial institutions are under pressure to establish clearer governance measures. Countries like the United States and members of the European Union have already laid out robust regulatory frameworks to enhance transparency, accountability, and consumer trust.

In South Korea, questions surrounding stablecoin misuse and financial instability are expected to dominate the upcoming National Assembly discussions. Given the growing concerns about money laundering vulnerabilities and volatility, lawmakers are being urged to fast-track updates to legislation, close regulatory loopholes, and enforce tighter oversight protocols.

As stablecoin adoption continues to rise, addressing these challenges will be crucial in shaping the future of digital assets. South Korea’s anticipated discussions this October could mark a turning point for the industry, leading to more secure and transparent operations in both domestic and international contexts.