[Insight & Opinion] The Pros and Cons of Stablecoin Issuance

As the digitalization of finance progresses, the legalization of stablecoins?a form of digital currency?is now imminent. In the United States, the so-called “Genius Act” has passed the Senate and is under review in the House of Representatives, while in Korea, the Digital Asset Basic Act has been introduced in the National Assembly, with efforts underway to expedite its enactment. Since stablecoins would allow private companies to issue currency?a function previously monopolized by central banks?their adoption is expected to have a significant impact not only on the global economy but also on the Korean economy. It is therefore necessary to carefully weigh their advantages and disadvantages.

First, considering the benefits, stablecoins can reduce transaction fees by utilizing blockchain technology and offer greater convenience in payments. They can also promote the development of the digital finance industry and, by increasing demand for government bonds used as collateral for issuance, help reduce the side effects of fiscal inflation and interest rate hikes caused by fiscal deficits in the short term.

However, there are also considerable downsides. The first is the potential weakening of monetary sovereignty. If private companies issue currency, the central bank’s ability to control the money supply may be diminished, and monetary substitution could erode the independence of monetary policy. Currently, high currency exchange fees mean that the use of dollars for payments or holdings in Korea is limited. However, if Korean residents begin to prefer dollar-denominated stablecoins over the won, monetary substitution could undermine the Bank of Korea’s ability to control the money supply, thereby weakening monetary sovereignty.

There are also concerns about inflation due to increased liquidity. The issuance of won-denominated stablecoins by private companies could greatly increase market liquidity. This could drive up stock and real estate prices, which in turn could weaken industrial competitiveness and slow economic growth. Even though this year’s growth rate is projected to be 0.8%, the recent sharp rises in stock prices and Seoul housing prices are also attributable to expectations of such a liquidity-driven market.

Increased financial instability could also trigger a financial crisis. When the central bank issues currency, it acts as a lender of last resort to prevent financial crises, and the Deposit Insurance Corporation protects financial consumers from losses through deposit insurance. However, in the case of stablecoins issued by private companies, increased insolvency and declining trust could lead to a “coin run”?a large-scale withdrawal of coins. Such side effects were also observed under the historical free banking system. In the 1830s, private banks were allowed to issue currency freely under the free banking system. However, as financial institutions became insolvent and trust in the system eroded, the system eventually gave way to today’s central banking system. In response to the need for digital currency, central banks are now pursuing the issuance of central bank digital currency (CBDC). However, as the Trump administration favored privately issued stablecoins, history appears to be repeating itself.

There are also concerns about increased capital outflows and the use of stablecoins in illegal transactions. It is expected that stablecoins will operate under a real-name system, requiring Know Your Customer (KYC) procedures when depositing into exchanges. However, due to the nature of blockchain, once funds are transferred to a hard wallet, it becomes difficult for financial authorities to monitor real-name transactions. This is why, despite the trend toward digital currency, fully anonymous transactions using cash remain popular. In addition, unlike with foreign exchange, it is not possible to impose preemptive capital outflow controls; only ex post regulation is feasible.

In summary, while stablecoins offer many benefits, their potential drawbacks are also significant. In particular, the balance of advantages and disadvantages may differ depending on each country’s circumstances. For example, countries like China, which are concerned about capital outflows and monetary substitution, are strengthening regulations such as real-name systems, whereas countries like the United States, which anticipate capital inflows, are easing regulations and seeking to incorporate stablecoins into the institutional framework. Policymakers must establish laws and systems for digital assets that are appropriate for Korea’s situation. In the past, Korea suffered a foreign exchange crisis due to hasty capital liberalization, while China, seeking to avoid Korea’s experience, has refrained from capital liberalization and is now facing challenges from U.S. tariffs and dollar-denominated stablecoins. At this time, it is crucial for policymakers to adopt prudent measures in response to the legalization of stablecoins.

Kim Jeongsik, Professor Emeritus of Economics, Yonsei University