Taking a Closer Look
Korean Central Bank Examining Private Sector's Stablecoin Emission
The Bank of Korea is considering uniting deposit tokens with a public blockchain, placing their state-backed digital currency alongside privately issued stablecoins.
According to Deputy Governor Lee Jong-ryeol, these tokens will be "a type of stablecoin issued within the digital currency system built and operated by the Bank of Korea." He further mentioned that the initiative is being pursued from a "national perspective."
This hybrid system, however, may raise questions about its functionality across borders, as stated by Peter Chung, head of research at Presto Labs. While stablecoins on public blockchains can flow freely across borders, Chung believes that fiscal policies are more instrumental in safeguarding monetary sovereignty.
Lee also addressed the increasing use of global stablecoins in South Korea, expressing concerns over potential violations of monetary sovereignty, weakened policy controls, financial instability, and increased money laundering risks.
In Q1 2025, South Korea witnessed a significant outflow of $19.5 billion worth of stablecoins such as USDT and USDC. This has prompted a proposal for a won-backed stablecoin from South Korean political leader, Lee Jae-myung, to reduce capital outflows and dependence on dollar-denominated tokens.
The Bank of Korea is also part of the Agora Project, a cross-border settlement system designed to prevent the direct use of deposit tokens in other countries.
On a global scale, stablecoin usage is on the rise, with a total market cap of $249.6 billion.
A Deeper Insight
The hybrid system could affect monetary sovereignty across jurisdictions in several ways:
- Domestic Sovereignty: Control and regulation are key to maintaining domestic monetary sovereignty. The regulatory oversight of Bank of Korea’s deposit tokens helps preserve control over the domestic financial system, as these tokens are backed by the Korean won.
- Capital Retention: By offering a won-denominated stablecoin alternative, South Korea intends to retain capital and maintain economic stability, reducing outflows and control over domestic financial flows.
- International Sovereignty: Regulatory inconsistencies across jurisdictions may lead to complications in cross-border transactions, potentially threatening monetary sovereignty. Coexistence of state-backed and private stablecoins also requires careful management to ensure compliance with international standards without compromising monetary sovereignty.
- Regulatory Challenges: Harmonization and robust risk management frameworks are essential to prevent misuse of stablecoins, ensure compliance, and mitigate systemic risks.
In conclusion, the hybrid system can enhance domestic monetary sovereignty by offering a local, compliant digital currency alternative to foreign stablecoins. However, international challenges like ensuring regulatory harmony and managing systemic risks across jurisdictions must be addressed to maintain and strengthen monetary sovereignty in the evolving digital currency landscape.
- The Bank of Korea's proposed hybrid system of deposit tokens and a public blockchain aims to position a state-backed digital currency alongside privately issued stablecoins, making it a type of stablecoin within the digital currency system.
- This initiative is being pursued from a national perspective, aligning with the South Korean political leader's proposal for a won-backed stablecoin to reduce capital outflows and dependence on dollar-denominated tokens.
- The hybrid system could potentially raise concerns about its functionality across borders, as stablecoins on public blockchains can flow freely but fiscal policies are deemed crucial in safeguarding monetary sovereignty.
- Control and regulation are essential to maintaining domestic monetary sovereignty, with the regulatory oversight of Bank of Korea’s deposit tokens helping preserve control over the domestic financial system.
- By offering a won-denominated stablecoin alternative, South Korea hopes to retain capital and maintain economic stability, reducing outflows and control over domestic financial flows.
- Harmonization and robust risk management frameworks are necessary to prevent misuse of stablecoins, ensure compliance, and mitigate systemic risks, especially in the coexistence of state-backed and private stablecoins across jurisdictions.
