The Bank of Korea has issued a warning about the risks involved with stablecoins and has instead asked traditional banks to come forward and take the lead in ensuring monetary trust.

Basically, the South Korean central bank is concerned about stablecoins failing to maintain their peg with the won, according to a report published on October 28.

Stablecoins must be backed by trust

Even as the South Korean stablecoin market has witnessed notable growth over the past years, much of it has been led by private companies, which the central bank believes could open the door to financial instability.

The Bank of Korea warned that private issuers often lack the institutional trust and “high level of publicness” required to safeguard value stability during times of market uncertainty or when undergoing operational disruption.

Without a credible public institution backing the asset, these tokens could depeg and undermine the very trust that makes currency work in the first place, it warned.

The central bank wants licensed banks to take the lead in issuing won-backed digital assets as they are already embedded in the centralised monetary framework.

As such, they are better positioned to manage reserves and ensure liquidity is maintained, all the while upholding public accountability in case redemption rate spike or the market loses faith in the stablecoin. 

“Currency operates not on technology, but on trust,” the bank said in the report.

Depegging was singled out as a structural risk, not just a technical issue. Even widely adopted stablecoins like USDC and USDT have struggled with under pressure. 

The Terra-Luna collapse and USDC’s drop to $0.88 during the SVB crisis were both cited as reminders that reserve quality and issuer credibility matter as much as the blockchain they operate on.

In the central bank’s words, “if the value of the reserve assets declines due to risky investments, the promise cannot be kept.”

Beyond market risk, consumer protection remains another blind spot.

Stablecoin holders are not covered under South Korea’s deposit insurance system, nor can they rely on the central bank for emergency liquidity if an issuer collapses. 

The central bank notes that this lack of a legal safety net makes retail users vulnerable to sudden losses, particularly if the issuer fails to honour redemptions. 

There’s also concern that allowing non-bank firms to issue stablecoins could dilute financial discipline. 

Companies in tech or retail could effectively issue private money to serve their own platforms, distorting competition and increasing economic concentration.

The bank warned of a scenario where “big tech integrates financial and payment services into their own commerce networks,” potentially locking in users and merchants to proprietary tokens. 

Such developments, it said, would undermine the separation between industrial and financial capital that underpins Korea’s economic system.

Bank of Korea is not against stablecoin innovations

Despite the criticism, the central bank is not opposed to innovation itself and has made clear that it “does not seek to block innovation.”

To support stablecoin oversight, the central bank wants multiple agencies working together, and it’s already running a pilot called Project Hangang, which is a pilot program testing bank-issued tokens within a controlled blockchain network.

These tokens offer the programmability and settlement speed of stablecoins while constrained within a regulated environment.

At the moment, the stablecoin market in South Korea is dominated by private projects like KRWIN and KRW1 that are pegged to the local currency.

Amidst this backdrop, South Korea’s Financial Services Commission is expected to submit a new stablecoin framework to the National Assembly before year-end, as part of the second phase of the Virtual Asset User Protection Act.

The post South Korea’s central bank pushes back on private stablecoin dominance appeared first on Invezz