"Seven Risks of Korean Won Stablecoins"... Bank of Korea Releases White Paper

Coin Runs, Erosion of Banking-Commerce Separation, Big Tech Monopoly, Regulatory Arbitrage Risks, and More
Seven Key Issues Must Be Addressed
"Bank-Centered Consortium Should Be Considered for Rapid Adoption"

On the 27th, the Bank of Korea released a white paper outlining key issues and countermeasures ahead of the introduction of a Korean won stablecoin. The Bank of Korea emphasized, "As a central bank tasked with price stability and financial stability under the Bank of Korea Act, it is our duty to raise concerns if stablecoins have the potential to destabilize the currency or financial system." It identified seven risks that may arise with the activation of a Korean won stablecoin. The Bank explained that, in order to minimize these risks while enabling rapid adoption, it is necessary to first consider an introduction through a consortium centered on banks, involving both banks and non-bank entities (such as big tech companies).

(From left) Junhong Park, Head of Payment Policy Team, Payment and Settlement Department, Bank of Korea; Byungmok Lee, Director of Payment and Settlement Department; Cheol Kim, Head of Payment Policy Division, Payment and Settlement Department; Gwansoo Bong, Head of Credit Policy Division, Monetary Policy Department; Shinyoung Kim, Head of Foreign Exchange Division, International Department, are attending the press conference titled "Currency in the Digital Age, Harmony of Technology and Trust: Key Issues and Countermeasures of Korean Won Stablecoins" held on the 27th at the Bank of Korea in Jung-gu, Seoul, responding to questions. Bank of Korea

Problems Arising from the Breakdown of 1:1 Value Maintenance... "Currency Relies on Trust, Not Technology"

The first risk highlighted is the risk of depegging. This refers to the frequent breakdown of the promise to maintain a "1:1 value" with legal tender. Junhong Park, Head of the Payment Policy Team at the Bank of Korea's Payment and Settlement Department, stressed at the white paper briefing held that day that even major dollar stablecoins such as Tether (USDT) and Circle (USDC) are no exception. Park explained, "Tether promises '1USDT=1 dollar,' but whenever there is liquidity instability in the market, its value has repeatedly dropped significantly," adding, "This issue arises because stablecoins exist outside the central bank system and therefore fail to meet the 'singleness of currency' requirement."

In the case of bank deposits, 1 million won deposited at KB Kookmin Bank and 1 million won at Shinhan Bank can be exchanged 1:1 with central bank money. This is because, through the reserve requirement system, deposits are always exchanged equally between banks within the central bank settlement system. However, even if a stablecoin’s reserve assets are composed of safe assets such as government bonds, the value of each stablecoin can differ depending on the composition ratio of reserve assets and the issuer’s creditworthiness, making 1:1 exchange between stablecoins often difficult. Park stated, "If the value of a stablecoin becomes unstable, the credibility of the entire currency and payment settlement system could be undermined," emphasizing, "the risk of depegging is even more serious for non-dollar stablecoins with limited circulation."

The second risk is that even if stablecoins are backed 100% by safe reserve assets, a "coin run" (a rush by coin holders to redeem their coins for cash) can still occur. Park explained, "If the depegging becomes severe, users will try to redeem their coins all at once," and "if a large number of holders attempt simultaneous redemption with a single click, the shock could rapidly and widely spread from the virtual asset market to the traditional financial market through mass sell-offs of reserve assets." In this respect, a coin run could occur much faster than a bank run.

The third risk identified is a "consumer protection gap." Privately issued stablecoins are merely substitutes for currency used outside the central bank system, and there is no guarantee they can be exchanged 1:1 for legal tender. The promise of "1 coin = 1 won" is merely a private contract between the issuer and the user, and is not legally or institutionally guaranteed by the state or the central bank. Park stated, "If the issuer fails to honor its redemption promise, stablecoin holders, unlike depositors, are not protected under the Depositor Protection Act," and "unlike banks, central banks cannot act as lenders of last resort to provide liquidity support to stablecoin issuers in times of crisis." If such private contracts collapse, the resulting losses would fall entirely on the contracting parties, namely the public.

Erosion of the Principle of Separation between Banking and Commerce... Risk of Big Tech Monopoly and Concentration of Economic Resources

The fourth risk is the erosion of the principle of separation between banking and commerce. One of the core principles of Korea’s financial system is the separation of industrial and financial capital, meaning that industrial capital cannot directly engage in banking. Allowing non-bank companies such as IT or distribution firms to issue stablecoins is essentially equivalent to permitting them to issue currency and provide payment services simultaneously, effectively allowing narrow banking. Park stated, "In Korea, big tech companies have established powerful networks, so if these companies issue stablecoins, they could further strengthen their monopoly by integrating financial and payment services into their own e-commerce platforms," adding, "If big tech companies encourage merchants on their platforms, such as small business owners, to use their own stablecoins for payments, these merchants could become even more dependent on big tech."

This conflicts with the fundamental purpose of the separation of banking and commerce, which is to prevent conflicts of interest, unfair competition, concentration of economic power, and the spread of risk resulting from the combination of financial and industrial capital. Park emphasized, "The purpose of this separation is not only to prevent large corporations from establishing banks and lending to their affiliates," but also "to prevent the risk of economic resources in Korea being concentrated in one place as large corporations absorb funds, and to prevent various unfair practices that could arise in this process."

The Bank of Korea stressed that Korea must seriously consider the increased risks stemming from the concentration of economic power in the market. If stablecoins issued by large corporations lose value due to external shocks in the financial markets, rather than their own fault, the credibility of these companies could also be shaken. Park stated, "Even the United States, which enacted the stablecoin regulatory law (Genius Act), clearly recognizes these risks and applies very strict standards to the issuance of stablecoins by non-bank listed companies," adding, "Before allowing non-bank companies to issue stablecoins, there must first be social debate and consensus on the principle of separation between banking and commerce."

The fifth risk is regulatory arbitrage and capital outflow. Due to the nature of blockchains on which stablecoins are issued, while transaction tracing is easy, it is very difficult to identify the parties involved. For example, a domestic investor could transfer Korean won stablecoins to a personal wallet that allows anonymous transactions, convert them into other assets such as dollar stablecoins, and move them overseas, all without significant regulatory oversight. According to global blockchain transaction analysis firm Chainalysis, 63% of illegal virtual asset transactions worldwide last year involved stablecoins. Park warned, "If Korean capital crosses borders under the cover of the anonymity of Korean won stablecoins, we could lose monetary sovereignty," stressing, "Before expecting innovation, it is essential to prepare countermeasures for such risks first."

The sixth risk is the weakening of monetary policy effectiveness. Stablecoins function as money but operate outside the scope of central bank monetary policy. While central banks have the authority and tools to control the money supply for banks-such as reserve requirements, open market operations, and liquidity lending facilities-no such controls exist for stablecoins. The issuance of Korean won stablecoins could also increase short-term interest rate volatility. Purchases of reserve assets by stablecoin issuers exert downward pressure on short-term interest rates. Conversely, if a coin run triggers large-scale simultaneous asset sales, short-term interest rates will be pushed upward. In either case, if these movements conflict with the direction of monetary policy, the transmission of policy rate adjustments to the economy becomes weaker. Park explained, "If the impact of the Bank of Korea's monetary policy is reduced, achieving the goals of price stability and financial stability will naturally become more difficult," adding, "For this reason, major countries are granting regulatory authority to central banks so they can effectively conduct monetary policy even in environments where stablecoins are issued and circulated."

The final risk is the potential weakening of the financial intermediation function. As stablecoin issuance increases, retail deposits-long the foundation of Korea’s economic growth-could flow out of banks, reducing their capacity to provide stable lending. This is because retail deposits, the basis for lending, would flow to stablecoin issuers and be used to purchase reserve assets such as bonds instead of being lent out. In this process, the banks’ positive function as financial intermediaries could also be weakened. If lending, deposit, and other financial intermediation activities using stablecoins in decentralized finance (DeFi) become widespread, demand for traditional bank deposits could decrease, and the intermediation function itself could shift away from banks. Park stressed, "While financial intermediation in decentralized finance can include a broader range of users and improve efficiency from a financial inclusion perspective, it is important to note that it operates outside the control of the government and central bank and facilitates illegal transactions through anonymity." In particular, if the stable base of retail deposits at banks is undermined, this could lead to higher funding and lending rates for banks, making it harder for households and businesses to access the loans necessary for economic growth. This could pose even greater challenges for small business owners and small- and medium-sized enterprises with limited access to capital markets.