[Insight & Opinion] KRW-Based Stablecoins: Lessons from Modern Banknotes

Expectations for Connectivity with Traditional Finance
Different Issuers and Regulatory Gaps Remain Issues
Unified Standards Needed from the Design Stage

The latest emerging market attracting attention from the financial sector and the virtual asset industry is the "KRW-based stablecoin." There have been a series of reports that traditional banks, fintech companies, and virtual asset exchanges are either considering or preparing to issue their own stablecoins. While the issuers and design methods may differ, they all share a common goal: pegging the value of the stablecoin 1:1 to the Korean won. This is drawing significant attention because it could serve as the won on the blockchain, forming the foundation for payments, remittances, and financial services. There are also high expectations that it could act as a bridge between the DeFi (decentralized finance) ecosystem based on digital assets and traditional finance, as evidenced by the surge in related companies' stock prices.

However, this trend inevitably brings to mind the "Free Banking Era" (1837-1863) in modern American history. During this period, after the dissolution of the federal central bank, numerous state-level banks in the United States issued their own banknotes. Although all were nominally denominated in "dollars," in reality, the value and circulation potential varied depending on each bank's creditworthiness, location, and redeemability, causing confusion. The proliferation of private currencies led to problems such as counterfeiting, insolvency, and trust issues, which ultimately prompted the federal government to enact the National Bank Act, authorize banks, and issue a unified national currency.

Today, KRW-based stablecoins in Korea face similar risks. If the issuers differ, there can be significant differences in collateralization methods, redemption guarantees, accounting treatment, and transparency on the blockchain. For example, some issuers may hold 100% of the actual KRW deposits as reserves, while others may issue coins based on assets such as government bonds or commercial paper. Initially, these coins may circulate under the simple perception of "1 coin = 1 won," but over time, coins from certain issuers may gain more trust, while others may see their financial soundness deteriorate due to excessive interest or staking rewards. Furthermore, some coins could see reduced circulation or a drop in the value of collateral assets, resulting in their price falling below 1 won.

In fact, the more fundamental issue in the Korean market is the regulatory vacuum. Currently, Korea lacks a clear institutional definition or regulation for KRW-based stablecoins. While this may provide flexibility to the market, it also increases uncertainty and systemic risk. In the United States, several state governments have already established guidelines for stablecoin issuance, and there are active discussions at the federal level about restricting stablecoin issuance to banks only. The European Union is also imposing strict conditions on the issuance and circulation of stablecoins through the MiCA regulation, with detailed requirements for reserve composition and external audits already in place.

Under these circumstances, if commercial banks, internet banks, major fintech companies, and virtual asset exchanges each issue stablecoins under different conditions and systems, it may initially appear innovative but could ultimately cause confusion among financial consumers and destabilize the system. For users holding these coins, concerns about cash redemption and value guarantees are bound to grow. If regulatory authorities later intervene and attempt to introduce uniform regulations, there could be significant side effects in recalling already circulated stablecoins or converting them to unified standards.

The government and financial authorities must recognize that now is the "time for design," not for passive observation. Rather than leaving everything to the market, they need to preemptively establish fair and unified standards, transparent accounting rules, issuer qualification requirements, and reserve management criteria, and allow or restrict issuance based on those standards. It is also necessary to clarify whether to introduce supervisory authority for specific institutions or an approval system. History repeats itself. This is why, as we design the currency of the digital age, we must not forget the lessons from the past era of rampant banknotes.

Kim Kyuil, Professor at Michigan State University