[Financial Microscope] 'Hot Potato' in the Presidential Election... Key Issues in Stablecoin Legislation

Market Size Approaches $250 Billion... Forecast to Reach $2 Trillion in Three Years
Stablecoins as a New Payment Method: How to Guard Against Side Effects
'Won-Based' Market Order vs. Activation: How to Break the Dilemma

"A won-based stablecoin market must also be fostered to prevent the outflow of national wealth." (Lee Jaemyung, Democratic Party of Korea candidate)

"I am curious about what mechanisms will be put in place to prevent the illegal circulation of funds in the stablecoin market." (Lee Junseok, Reform Party candidate)

The 'stablecoin' issue has rapidly emerged ahead of the June 3 presidential election. While stablecoins are expanding their influence as a new means of payment in global markets, South Korea still lacks a proper legal and institutional framework for them. Experts point out that, as stablecoins become a new payment method, it is necessary to comprehensively review, from the initial legislative design, both measures to guard against side effects and issues to consider for the introduction and activation of won-based stablecoins.

Market Size Reaches $250 Billion, Stablecoins Emerge as New Payment Method

Stablecoins are virtual assets designed to peg or stabilize their value to specific assets such as the US dollar or gold. Tether (USDT) and Circle (USDC), which are pegged one-to-one to the US dollar, are representative examples. The reserve assets for stablecoins consist mostly of US Treasury bonds. As the stablecoin market grows, demand for US Treasuries also increases. This is why US President Donald Trump is supporting dollar-based stablecoins. President Trump is pursuing policies to promote the strategic assetization of Bitcoin, prohibit CBDCs (central bank digital currencies), and activate dollar-based stablecoins as international payment methods.

Driven by US initiatives, the stablecoin market is expanding rapidly. The market capitalization surpassed $200 billion for the first time last December, 10 years after the launch of the first stablecoin (BitUSD), and is now approaching $250 billion. As of the end of March, Tether and Circle, the world's top two stablecoin issuers, held $128.3 billion in US Treasuries, surpassing South Korea's holdings of $125.8 billion. Standard Chartered forecasts that the market will reach $2 trillion by 2028, three years from now.

In South Korea, the use of dollar-based stablecoins is also spreading. Prepaid cards that can be topped up with Tether and used for domestic payments via the Visa network are already in use, and offline currency exchange offices handling stablecoins are also emerging.

Stablecoins as a New Payment Method: How to Guard Against Side Effects

The issues surrounding stablecoins can be broadly divided into two categories. The first issue concerns how to handle stablecoins as a new payment method within the country. As the use of dollar-based stablecoins spreads domestically, the main problems identified are a decrease in the share of won-based payments, which could undermine monetary sovereignty and the effectiveness of monetary policy. Other potential issues include the weakening of banks' credit intermediation functions, disruption of the government bond market, exchange rate increases, capital outflows, and the risk of a 'coin run.'

Hwang Wonjeong, Senior Researcher at the International Finance Center, pointed out, "If a large volume of government bonds is tied up as collateral for stablecoins, it could impair the liquidity and depth of the government bond market. In the event of a surge in redemption requests, forced sales of government bonds could transmit shocks to the global financial system. The weakening of credit intermediation and market disruption could also prevent the effective transmission of monetary policy through credit and interest rate channels."

Lee Seungseok, Senior Research Fellow at the Federation of Korean Industries, also warned, "The rapid capital mobility and decentralized structure of dollar-based stablecoins could accelerate large-scale capital outflows during crises. It could also bring structural changes to the won-dollar exchange rate mechanism. If 2.4 million dollar-based stablecoins are issued, the won-dollar exchange rate could rise by 10%, and the KOSPI index could plummet."

Given that payments and remittances can be made by bypassing banks, there is a need for swift regulatory improvements. On May 5, Bank of Korea Governor Lee Changyong said at a press briefing, "The risk of circumventing our capital and foreign exchange market regulations through dollar-based stablecoins such as USDT has increased, making it urgent to establish related regulations."

'Won-Based' Market Order vs. Activation: How to Break the Dilemma

The second issue concerns the introduction of won-based stablecoins. There is a need for clear legal standards for the issuance and operation of stablecoins, a systematic legislative framework that harmonizes with the Foreign Exchange Transactions Act, and robust investor protection by minimizing the risk of value loss. At the same time, won-based stablecoins must be as convenient and accessible as the already established dollar-based stablecoins to ensure their activation.

South Korea has yet to establish a comprehensive regulatory framework to foster a healthy digital asset market. Since the government's emergency measures on virtual currencies in 2017, only minimal legislation has been enacted. After the first phase of legislation for user protection and market order was implemented in April last year, the second phase, aimed at securing market transparency and fairness, is now underway. The Democratic Party also plans to propose the 'Digital Asset Basic Act.' Key provisions include requiring stablecoin issuers to hold at least 5 billion won in reserves and obtain approval from the Financial Services Commission.

Experts stress that the opinions of relevant agencies and market participants must be comprehensively reflected from the legislative design stage. In this regard, the Bank of Korea believes that the central bank should be substantively involved at the approval stage. A Bank of Korea official emphasized, "We must foster the positive aspects of stablecoin adoption, such as blockchain technology development, while minimizing potential negative impacts on the monetary and financial system to build a digital payment and settlement ecosystem. It is desirable to establish an ecosystem encompassing the central bank digital currency currently being promoted by the Bank of Korea, as well as deposit tokens and stablecoins based on it."