South Korea Advances Stablecoin Regulatory Framework with Key Measures on Interest, Issuance, and Capital Requirements

The Bank of Korea (BOK) has taken a significant step in defining its regulatory stance on payment-oriented stablecoins by officially submitting key principles to the National Assembly. As stablecoins continue to gain prominence in the financial ecosystem, the BOK has highlighted concerns over their potential to disrupt traditional banking systems and has proposed robust measures to mitigate risks.

Prohibition of Interest Payments to Stablecoin Holders

The Bank of Korea’s regulatory framework explicitly prohibits interest payments to stablecoin holders—a move aimed at curbing the possibility of stablecoin adoption displacing traditional bank deposits. The BOK stated, “Stablecoins have the rapid potential to substitute traditional deposit systems, making it crucial to strictly prohibit interest payments to their holders.” This prohibition aligns with practices in other jurisdictions, such as the European Union's Markets in Crypto-Assets (MiCA) regulation and the U.S.-proposed "Genius Act," which similarly ban interest payouts for stablecoins.

By restricting interest payments, the central bank seeks to minimize risks associated with widespread adoption of stablecoins as substitutes for bank deposits, which could ultimately undermine the role of traditional financial institutions in the Korean economy.

Oversight of Large-Scale Stablecoin Issuance by the Monetary Policy Board

To further strengthen regulatory control, the BOK proposes direct oversight by its Monetary Policy Board for stablecoin issuances that surpass certain thresholds. The rationale behind this measure is to prevent excessive issuance from upsetting the economy's liquidity through uncontrolled increases in broad money supply.

Issuance exceeding specified limits would fall under the supervision of the board, enabling the central bank to monitor and manage monetary risks more effectively. This provision ensures that stablecoin proliferation does not compromise financial stability or interfere with the broader economic policies being implemented by the central bank.

Introducing Tiered Regulatory Capital Requirements

Another critical feature of the Bank of Korea’s framework is tiered capital requirements based on the issuance scale of stablecoins. As part of its proposal, the central bank suggests a minimum capital requirement of 25 billion won (approximately USD 19 million) for stablecoin providers, with higher thresholds set progressively based on larger issuance sizes.

This proposed figure significantly surpasses existing capital requirements outlined in current legislative proposals under review in the National Assembly. For example, lawmakers' proposals range from a minimum of 500 million won, as suggested by lawmaker Min Byung-deok, to higher proposals such as 5 billion won or more from Kim Eun-hye, Kim Jae-seop, Ahn Do-geol, and Kim Hyun-jung. The Bank of Korea’s stricter capital requirements reflect its focus on maintaining market resilience and addressing systemic risk concerns.

Unclear Guidelines for Reserve Ratios and Central Bank Deposits

Despite offering granularity on some regulatory aspects, the BOK stopped short of providing definitive rules on reserve requirements and the need for central bank deposits. These pivotal elements of stablecoin regulation will require further examination by a potential policy consultation body to ensure alignment with monetary policy objectives and financial stability imperatives. This omission leaves room for potential debate and refinement of the framework as stakeholders weigh in during upcoming consultations.

Legislative Significance and Anticipated Debates

The Bank of Korea’s formalization of stablecoin regulations represents a critical development in South Korea's evolving financial landscape. By restricting interest payments, introducing oversight for large-scale issuances, and implementing tiered capital requirements, the BOK signals its intent to take a more hands-on role in governing stablecoin operations and mitigating risks to financial stability.

These measures are set to be a focal point during the National Assembly audit scheduled for the same day as the framework’s release. Lawmakers are poised to deliberate on their implications, balancing innovation and cryptocurrency adoption with the need to safeguard the country's banking system and monetary policy.

South Korea's proactive approach underscores a global trend among central banks prioritizing stablecoin regulation amid concerns over deposit displacement and increased volatility in money supply. As stablecoins evolve and their adoption accelerates, the Bank of Korea’s regulatory principles serve as an important precedent for other jurisdictions grappling with similar challenges. Looking forward, the details deferred for further review, particularly those concerning reserve ratios and deposit requirements, will play a critical role in shaping the final framework's effectiveness.

In taking these steps, the Bank of Korea positions itself at the forefront of stablecoin regulation while addressing broader implications for the traditional banking sector and the national economic landscape. This strategic move reflects the central bank's ongoing efforts to maintain financial stability in an era increasingly influenced by digital currencies.