South Korea's Central Bank Warns of Stablecoin Risks in Digital Currency Report

South Korea’s Bank of Korea (BOK) has raised alarms about the risks posed by won-pegged stablecoins, urging safeguards to protect monetary stability amid the rise of privately issued digital assets.

Report Overview: “Currency in the Digital Age”

The BOK’s report, titled “Currency in the Digital Age: Harmony of Innovation and Trust,” highlights how rapid stablecoin growth could undermine financial systems. It stresses that currency stability depends on regulated banking, not private tech, and warns of systemic vulnerabilities from depegging and illicit flows. Despite opposition, eight major banks have formed a consortium to develop won-linked stablecoins using trust or deposit models.

Major Risks: Depegging and Illicit Flows

The BOK identifies depegging risks from poor collateral management, citing the 2022 TerraUSD collapse as a cautionary tale. It also flags illicit capital flows, speculative trading, and foreign outflows that could erode peg confidence. Non-bank issuers might weaken monetary control, causing liquidity shocks and foreign exchange disruptions. The report notes that while stablecoins enhance payment efficiency, private ones threaten domestic markets.

Recommendations: Regulated Issuance and Oversight

The BOK recommends limiting issuance to regulated banks under central bank supervision, with strict reserve audits, issuance caps, and minimum capital requirements. Governor Rhee Chang-yong opposes non-bank issuance, arguing it dilutes control. The Financial Intelligence Unit is updating anti-money laundering guidelines, with new rules for stablecoin issuers by December.

Implications: Balancing Innovation and Stability

The report signals regulatory tensions, as stalled bills like the Digital Asset Basic Act debate issuer eligibility. With 10.8 million trading accounts (20% of the population) and $24 billion in losses from H1 2025, South Korea’s market remains active. Global partnerships, like Circle and Solana, underscore the need for compliance to prevent dollar-backed stablecoins from dominating.

In summary, the BOK’s warnings emphasize regulated stablecoins for safe innovation, safeguarding monetary policy in South Korea’s dynamic crypto landscape.