South Korea’s central bank flags FX risks as lawmakers debate stablecoin issuance

The Bank of Korea (BOK) has issued a stern warning regarding the potential risks associated with the institutional issuance of stablecoins, particularly focusing on their impact on the nation’s foreign exchange (FX) markets and monetary sovereignty. This alert comes as South Korean lawmakers intensify debates over comprehensive digital asset legislation, which includes provisions that could authorize financial institutions to issue private stablecoins.

In a recent policy briefing, the BOK emphasized that widespread adoption of foreign-currency-pegged stablecoins could lead to substantial cross-border capital flight, potentially destabilizing the Korean Won and rendering traditional monetary policy tools less effective. The central bank highlighted the dangers of ‘digital dollarization,’ where stablecoins pegged to major reserve currencies might replace the local currency for everyday transactions or savings, undermining the BOK’s control over liquidity and inflation.

Lawmakers in the National Assembly are currently drafting the Digital Asset Basic Act (DABA), which aims to establish a robust regulatory framework for the burgeoning crypto sector. A contentious point within the draft is whether to allow established financial entities, such as commercial banks, to issue their own stablecoins under strict regulatory supervision. Proponents argue that institutional stablecoins would enhance financial innovation and efficiency, providing a regulated alternative to volatile, offshore crypto assets.

However, the BOK insists that any authorization for institutional stablecoins must be preceded by comprehensive safeguards against systemic risk. The central bank is pushing for mechanisms that mandate full collateralization, clear redemption rights, and rigorous oversight of the reserve assets to prevent scenarios similar to past stablecoin collapses. The BOK asserts that regulatory clarity and strong protective measures must be finalized before any institutional issuance is permitted, ensuring that the drive for digital innovation does not compromise national financial stability.

Source: South Korea’s central bank flags FX risks as lawmakers debate stablecoin issuance