Bank of Korea Governor Warns on Stablecoin Risks Amid Crypto Policy Shifts

Bank of Korea Governor Lee Chang-yong has raised concerns about won-denominated stablecoins potentially bypassing capital flow controls. His comments came at the Asian Financial Forum in Hong Kong as South Korea prepares to open institutional crypto trading.

The governor acknowledged market pressures driving policy changes. South Korean authorities now allow residents to invest in overseas-issued virtual assets. Financial regulators are also considering a new registration system for domestic institutional issuance.

RTHK reported that Bank of Korea Governor Rhee Chang-yong, speaking at the Asian Financial Forum in Hong Kong, noted South Korea has allowed residents to invest in overseas-issued virtual assets amid market pressure, while regulators are considering a new registration regime that…

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Lee emphasized that stablecoins remain controversial despite their growing adoption. He specifically warned about combinations of won-denominated and U.S. dollar stablecoins creating regulatory loopholes.

The central banker noted U.S. dollar stablecoins are widely accessible with lower transaction costs than direct dollar usage. Exchange rate volatility could trigger massive fund inflows into these instruments, complicating monetary oversight.

Historic Crises Shape South Korea’s Cautious Stance

South Korea’s wariness stems from devastating foreign exchange crises in recent decades. The 1997-98 Asian Financial Crisis and 2008-09 global meltdown both hammered the Korean economy severely.

During the Lehman Brothers collapse aftermath, Korea experienced net outflows of $46.5 billion within four months. The economy virtually ground to a halt during this period of financial stress.

The won depreciated sharply throughout 2008. Starting at 937 against the dollar in January, it plunged to 1,500 by late November. This decline exceeded even Eastern European currencies that received IMF rescue packages.

Korea avoided IMF intervention through emergency currency swaps totaling $80 billion. The United States, Japan, and China provided these critical lifelines during the crisis.

The 2008 experience proved particularly puzzling given Korea’s apparent financial stability. Corporate debt-equity ratios had fallen from 400% in 1997 to roughly 80%. Foreign reserves stood at $240 billion, ranking sixth globally.

Lee warned against forgetting lessons from these periods. He urged that reform efforts should not devolve into competitive deregulation among jurisdictions.

Governor Lee drew a clear distinction between general deregulation trends and digital finance oversight. Simplification may boost real economic activity short-term, he acknowledged.

However, he argued digital finance specifically requires strengthened regulation rather than relaxation. The sector’s unique risks demand heightened supervisory attention.

New Framework Opens Institutional Access

South Korea’s Financial Services Commission recently finalized guidelines ending a nine-year corporate crypto trading ban. The decision marks a significant shift for Asia’s fourth-largest economy.

Approximately 3,500 entities will gain market access under the new rules. Publicly listed companies and registered professional investment corporations qualify for participation.

🚨 BREAKING: SOUTH KOREA MOVES TO LIFT CORPORATE CRYPTO BAN, ALLOWING LISTED FIRMS TO INVEST UP TO 5% OF EQUITY IN TOP 20 CRYPTOCURRENCIES, ENDING THE 2017 RESTRICTION. pic.twitter.com/xcJvo8JzVz

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The framework caps annual crypto investments at 5% of equity capital per eligible corporation. Investment options remain limited to top-20 cryptocurrencies by market capitalization on Korea’s five major exchanges.

Regulators will mandate staggered execution and order size limits on exchanges. Whether dollar-pegged stablecoins like Tether’s USDT qualify remains under active discussion.

Meanwhile, Lee noted South Korea’s advanced fast payment infrastructure. Retail central bank digital currency offers limited advantages given existing systems, he observed.

The central bank has conducted numerous pilot projects exploring digital currency applications. Tokenized deposits and wholesale CBDCs are being developed to preserve the traditional two-tier banking system.

Large-scale cash transfers through stablecoin channels concern Korean authorities. Such movements could destabilize markets during periods of exchange rate stress.

The governor’s stance reflects broader tensions in global crypto policy. Jurisdictions worldwide are balancing innovation encouragement against financial stability concerns.

Korea’s measured approach attempts to thread this needle carefully. Institutional access expands while authorities maintain vigilance over potential systemic risks.