[Roundtable] Stablecoin Institutionalization: Seeking Solutions for Both Market Innovation and Financial Stability

Asia Economy Special Roundtable: "The Path Forward for Korea’s Stablecoin Policy"
"Paradigm Shift?Policy Must Lay the Groundwork for Market Innovation... Addressing Risks as New Paths Open"
"From the Need and Feasibility of Foreign Exchange Regulation... Prior In-Depth Review Needed for Market Integration"
Bank and Non-Bank Consortium as an Alternative vs. Institutions Sharing a Vision Must Combine Their Strengths

With the institutionalization of won-based stablecoins on the horizon, the market is moving rapidly. Strategic alliances are actively forming, as seen in the partnership between the IT giant Naver and Dunamu, which operates the world’s third-largest virtual asset exchange. Experts unanimously agree that stablecoin policy must serve as a foundation for market innovation while also including compromises that do not undermine financial stability. On September 23, Asia Economy hosted a roundtable discussion titled "The Path Forward for Korea’s Stablecoin Policy," attended by Dogul Ahn, Member of the Democratic Party of Korea; Byungmok Lee, Director of the Financial Settlement Department at the Bank of Korea; Youngsik Kim, Professor of Economics at Seoul National University; and Byungyun Seo, Director of DSRV Future Finance Research Institute, who engaged in an in-depth discussion. The following is a Q&A from the event.

(From left) Youngsik Kim, Professor of Economics at Seoul National University, Dogul Ahn, Member of the Democratic Party of Korea, Byungyun Seo, Director of DSRV Future Finance Research Institute, and Byungmok Lee, Director of the Financial Settlement Department at the Bank of Korea, are sharing their opinions at the stablecoin roundtable held on the 23rd at the Asia Economy headquarters in Jung-gu, Seoul.

-There are both expectations and concerns as the introduction of won-based stablecoins is being pursued. Key issues include the requirements for issuers to enter the market, reserve asset requirements, soundness standards, and the cooperation system among relevant authorities. Which aspect would you most like to emphasize?

▲Director Seo: As we face a major system and paradigm shift, I want to stress the need to "move quickly." Instead of spending money to create a separate closed network, blockchain technology enables money transfers over the internet, which is the foundation of stablecoins. This approach is far cheaper, more efficient, and can be used without time lags. We cannot account for every possible scenario. The optimal approach should be found through rapid experimentation and ongoing improvements.

▲Director Lee: While I agree with the purpose of introducing stablecoins, I have significant concerns about conflicts with existing laws, such as foreign exchange regulations. If issued by non-bank entities, safeguards must first be put in place to protect users. That is why the Bank of Korea advocates for initial adoption by banks with proven regulatory compliance capabilities. Won-based stablecoins involve issues spanning foreign exchange, currency, and financial authorities, so I believe a consultative body among relevant ministries should be established to make policy decisions based on consensus.

▲Professor Kim: The core concerns are financial stability risks and regulatory arbitrage issues, such as Know Your Customer (KYC) requirements. In particular, reserve asset requirements are a critical consideration. Ultimately, the value of stablecoins is underpinned by the value of reserve assets, which in turn depends on the stability of the financial system and public trust. Reserve assets must be strictly limited to those with minimal market and liquidity risks. Transparent public disclosure of holdings and thorough pre- and post-audits should be the core of the regulatory framework.

▲Assemblyman Ahn: We are witnessing a transformation of money. New risks may emerge that we have not anticipated, but these can be prevented and blocked by establishing appropriate systems and mechanisms. The most important factor is monetary stability. My bill stipulates that issuers must hold reserves equal to the amount issued, that these reserves be stored and entrusted separately, and that assets be limited to highly liquid instruments such as short-term government bonds with maturities of less than one year. It also requires regular disclosure of asset holdings, with regulators monitoring and checking compliance.

-What are your thoughts on the issue of capital liberalization?

▲Assemblyman Ahn: If institutional measures such as KYC and anti-money laundering (AML) are well designed and tailored to stablecoins, monitoring and, if necessary, control are entirely possible. I believe these risk factors can be sufficiently addressed.

▲Director Lee: As you mentioned, if KYC and AML obligations are imposed on institutions within the blockchain ecosystem through the Act on Reporting and Use of Certain Financial Transaction Information, this could provide a safe regulatory framework. However, my greatest concern is about personal wallets. While transactions from exchanges to personal wallets can be controlled, transactions between personal wallets are difficult to trace. For example, with the MetaMask application, users can create personal wallets without providing personal information and can create multiple wallets. After assets are transferred from an exchange to a personal wallet, it becomes difficult to track subsequent transactions. If overseas exchanges support won-based stablecoin trading, it would effectively allow domestic users to deposit won with foreign financial institutions. They could also exchange for dollar-based stablecoins.

On the blockchain, addresses are not real names but alphanumeric codes. While transaction records are transparent and theoretically traceable, it is not easy to identify the individuals involved. It is more challenging than expected for government authorities to monitor illegal uses such as capital flight. Therefore, before issuing stablecoins, in-depth prior review is needed on how to apply foreign exchange regulatory frameworks to the virtual asset market, in cooperation with relevant authorities.

▲Director Seo: I agree. However, the reason KYC is not applied to all wallets, including MetaMask, is that requiring everyone to register their physical wallets with the government is akin to demanding that all physical wallets be registered. Not all cash transactions are tracked. I also question how long capital controls should be maintained. In reality, there are already offshore markets for the won, such as non-deliverable forward (NDF) trading. Given the existence of NDFs, I am not sure that the presence of stablecoin markets like Tether poses additional problems. In the long run, as capital markets mature, I believe controls should be relaxed.

▲Professor Kim: In fact, before debating how far to allow things, the issue is whether control is possible at all. Ultimately, the question of who should be allowed to issue stablecoins becomes crucial for effective control. I believe it is best to allow issuance gradually and sequentially, centered on banks with sufficient experience under the existing regulatory framework.

-What are your thoughts on concerns that stablecoins conflict with the principle of separating banking and commerce?

▲Director Seo: The separation of banking and commerce was introduced to prevent industrial capital from owning banks and granting unfair loans to specific companies, thereby transferring systemic risk. Stablecoins lack the lending function, so I question whether it is appropriate to apply the separation principle to them.

▲Director Lee: Allowing non-banks to issue stablecoins effectively permits "narrow banking" (banks that only perform payment functions without lending) and specialized payment banks. Although they do not lend, the fundamental purpose of separating banking and commerce is to prevent conflicts of interest and concentration of economic power between industrial and financial capital. In Korea, large non-bank corporations with platforms could rapidly grow in the stablecoin market due to network effects. Even without lending, increasing dominance in the payment services market could intensify economic concentration. Risks could be transferred between stablecoins and the main businesses of large non-bank corporations, and there is also the risk of unfair competition through the use of consumer data. In the United States, the GENIUS Act allows non-bank corporations to issue stablecoins only if they are listed companies and receive unanimous approval from the heads of the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation. I believe Korea should consider this when enacting its own laws.

▲Professor Kim: The purpose of separating banking and commerce is not merely to erect a firewall, but to address the inefficient allocation of financial capital that can occur when the separation is not maintained. Therefore, regulations should be gradually improved under the broad direction of the separation principle, to prevent capital from being allocated to serve the interests of specific companies.

▲Assemblyman Ahn: Stablecoins do not pay interest on cash deposits (most domestic bills prohibit interest payments). Therefore, I do not believe that large sums of money that would otherwise move through banks will flow into stablecoins. The efficiency gains from stablecoins will come from the creation of new channels that expand transaction volumes. There are new areas of transactions that only stablecoins can pioneer. As new "arteries" are opened, new added value will be created. Therefore, I believe non-bank entities with innovative ideas for new demand should be the main players in the stablecoin market.

-Is there a compromise that can ensure both financial stability and market innovation?

▲Director Lee: A consortium between banks and non-banks is an alternative. Banks would play a regulatory compliance role, while non-banks would contribute business models. In fact, Circle separates the issuer and distributor. In the United States, for PayPal’s stablecoin PYUSD, Paxos issues the coin and PayPal handles distribution. In Korea, forming a consortium led by banks with participation from non-banks, separating issuance and distribution, could reduce initial risks. Recently in Hong Kong, Standard Chartered Bank, a blockchain company, and a telecom company formed a consortium to apply for a stablecoin issuance license.

▲Director Seo: As mentioned, if a joint venture is established and large tech companies are registered as non-bank issuers, unanimous approval (as required by the U.S. GENIUS Act) would not be necessary. In Hong Kong, besides the Standard Chartered consortium, there are companies like JD.com, which received regulatory sandbox approval, similar to Coupang in Korea. The approach is to focus on the greater social benefits of reducing transaction costs on large-scale e-commerce platforms. Korea should also consider the social value that can be provided, rather than just adhering to principles.

▲Professor Kim: A key requirement for innovation is low uncertainty. Specifically, regulatory principles must be established and confidence in their stability is essential, as is certainty about the sustainability of the business. In this regard, the direction and basic principles of the initial institutionalization are of utmost importance. Gradual adoption could be a compromise that maintains financial stability while fostering market innovation.

▲Assemblyman Ahn: I agree with the points made. However, rather than dividing banks and non-banks, institutions that share a vision for new models should combine their strengths. Otherwise, the side with greater vested interests will dominate, preventing real innovation. Power struggles could derail the process. In the European Union, the Markets in Crypto-Assets (MiCA) regulation has banks at its center, defending the existing order. As a result, innovation has stalled and euro-based stablecoins have not grown. We should learn from this example.

-Another important issue is the relationship between stablecoins and the Bank of Korea’s central bank digital currency (CBDC). Can stablecoins and CBDC share an ecosystem?

▲Director Lee: The Bank of Korea recently conducted real transaction tests using institutional CBDCs and deposit tokens, which are tokenized bank deposits, through "Project Han River." Deposit tokens are a type of stablecoin in that they are issued and used on a distributed ledger. Next year, the Bank of Korea plans to use this system for national treasury subsidies in cooperation with the Ministry of Economy and Finance. As this is the first case since the founding of the Korean government, the Bank of Korea intends to actively pursue such institutional adoption and investment, working with banks that are proactive and innovative.

Deposit tokens can also enhance the stability and reliability of stablecoins. For example, dollar-based stablecoins are managed with about 80% in U.S. ultra-short-term government bonds, and in the event of a coin run, it may not be possible to liquidate assets as quickly as expected. If part of the reserves is held as deposit tokens, immediate response is possible.

▲Professor Kim: The key issue is whether the services provided by each payment asset serve unhealthy purposes such as tax evasion or threaten financial stability. There are concerns that stablecoins could foster undesirable demand, leading to financial instability and regulatory arbitrage. This is precisely why appropriate regulation and direction from the government, legislature, and the Bank of Korea are so important.

▲Director Seo: I believe it is desirable to allow stablecoins and CBDCs to compete on equal footing, letting the market decide based on effectiveness and choice.

▲Assemblyman Ahn: Using these systems to prevent fraudulent claims and fiscal leakage, and to improve the efficiency of treasury management, is a valid approach. The public sector has its own appropriate uses for stablecoins. Rapid payments could also provide public benefits. The Bank of Korea should operate independently, while the private sector should pursue its own separate roles.

-Regulatory issues regarding dollar-based stablecoins are also emerging. What regulatory measures do you think are most urgently needed?

▲Director Lee: I believe domestic distribution should be permitted only for stablecoins that have obtained issuance approval from foreign authorities with regulatory frameworks equivalent to domestic legislation and have reserve assets that meet international standards. Detailed standards for domestic distribution should be established, and reporting and registration procedures with financial authorities should be specified. It is also necessary to determine who will bear the redemption obligations for protecting domestic users.

▲Professor Kim: As with the relationship between the won and the dollar, converting won-based stablecoins to dollar-based stablecoins should be subject to KYC regulations. Efforts must also be made to prevent such conversions from becoming a means of circumventing existing foreign exchange regulations.

▲Assemblyman Ahn: Basically, I believe that stablecoins based on foreign currencies should be regulated to a degree comparable to won-based stablecoins. However, the extent of regulation should be determined in line with global standards and with consideration for market activation. My bill requires eligibility screening when listing on domestic exchanges.

▲Director Seo: Kim Jiyoon, the CEO of our company, recently returned from New York, where people on Wall Street asked, "In Latin America, dollarization is causing local currencies to disappear. Do you think the won can survive?" I suggest reframing the question: "How can the won survive in a digitalized world?" This is the real issue we should be considering now.

-What would be the ideal form of cooperation among authorities?

▲Director Lee: Stablecoins are currency substitutes. Since they entail the private sector issuing money directly, they have a significant impact on monetary authorities. From the Bank of Korea’s perspective, a policy cooperation body among relevant ministries must be established by law. I hope that decisions on issuance approval, reserve asset composition, and issuance volume will be made by consensus. Overall policy decisions should be made with consensus among the relevant authorities.

▲Assemblyman Ahn: I believe an organic cooperation system among government agencies is extremely important. Since each has different responsibilities, only reasonable regulation can maintain a sound ecosystem and ensure stablecoin utilization. My bill also requires a consultative body to ensure that major decisions are made through consultation. The Bank of Korea’s call for unanimity reflects the importance of close cooperation and consensus-building.

▲Director Seo: I believe it is also necessary to involve private sector participants with technological expertise when forming a cooperation system.

Moderator = Lee Seonae, Head of the Economic and Financial Department

Compiled by Kim Yuri and Kim Hyemin