The Bank of Korea (BOK) has issued a stark warning about the systemic risks posed by privately issued stablecoins, particularly those pegged to the South Korean won. In a recently published report, the central bank emphasized that these digital assets, despite being designed for price stability, are fundamentally vulnerable due to a lack of public trust in their issuers and insufficient oversight. The BOK underscored that stable currency systems can only be sustained through institutional credibility—something private entities often fail to provide.
Drawing historical parallels, the BOK compared modern-day won-pegged stablecoins to financial instability episodes such as the U.S. free banking era in the 19th century and Korea’s own monetary disruptions during the Dangbaekjeon crisis under King Gojong. These historical examples illustrate the dangers of allowing currency issuance to exist without strong regulatory frameworks and centralized backing.
“Money doesn’t function purely on the basis of technological innovation—it operates on trust,” the report states. This sentiment directly challenges the optimistic belief held by many in the blockchain community that decentralized technology alone can maintain economic stability.
The central bank’s chief concern is the risk of “depegging”—a situation in which a stablecoin fails to maintain its 1:1 peg with the underlying fiat currency. Such breakdowns erode user confidence, potentially triggering large-scale sell-offs and liquidity crises. The report warns that this risk is far from theoretical, citing recent instances where stablecoins have deviated from their pegs, causing significant market disruption.
To mitigate these dangers, the BOK argues that responsibility for issuing and managing stablecoins should rest primarily with traditional financial institutions, particularly licensed banks. Banks, the report notes, possess the regulatory compliance structures, internal risk management protocols, and public trust necessary to issue digital currencies in a reliable and controlled manner.
Furthermore, the BOK suggested that if stablecoins are to be allowed within the financial ecosystem, they must be subject to strict regulatory oversight equivalent to that of traditional banking products. This includes capital adequacy requirements, reserve backing mandates, and real-time audit mechanisms to ensure solvency and transparency.
In addition to institutional trust, the central bank also emphasized the importance of legal clarity. Currently, stablecoins operate in a grey area in many jurisdictions, including South Korea, where comprehensive legislation for digital assets is still under development. The BOK called for swift legal reforms to define the obligations and liabilities of stablecoin issuers, ensuring consumer protection and financial system integrity.
The report also pointed out the potential for systemic contagion. Should a large stablecoin issuer fail, especially one deeply integrated into the broader financial system, the fallout could extend far beyond the crypto market, affecting traditional markets, payment systems, and even monetary policy transmission.
Another challenge identified by the BOK is the lack of transparency in how private stablecoin issuers manage their reserves. Without clear, publicly available information on the assets backing these tokens, users are left to rely on the issuer’s word—an arrangement the BOK deems too risky for something that functions as a medium of exchange.
Moreover, the BOK warned that stablecoins could undermine the effectiveness of monetary policy if widely adopted outside the regulatory perimeter. For example, if a significant volume of economic activity is conducted using privately issued digital currencies, central banks might find it harder to control liquidity and interest rates, complicating macroeconomic management.
To address these concerns, the BOK proposed a model in which commercial banks act as the primary issuers and distributors of stablecoins, potentially under a public-private partnership framework. Under this model, banks would back stablecoins with central bank reserves or highly liquid government securities, thereby guaranteeing redemption and reducing the risk of depegging.
The report further highlighted the role of central bank digital currencies (CBDCs) as a safer alternative to privately issued stablecoins. The BOK is among several countries actively exploring a retail CBDC, which would provide a digital version of fiat money directly backed by the state. Such a solution, the bank argues, would offer the benefits of digital currency without the pitfalls of private issuance.
In conclusion, the Bank of Korea’s message is clear: while stablecoins present some technological and financial innovations, their widespread adoption without proper regulatory and institutional support could introduce significant risks to the financial system. To avoid repeating the mistakes of the past, the BOK urges a cautious and structured approach, placing trusted financial institutions at the center of any stablecoin framework.
Additional Analysis:
1. Stablecoin Market Trends
The global market for stablecoins has grown exponentially, with tokens like USDT and USDC dominating cross-border payments and decentralized finance (DeFi) platforms. However, their volatility during times of market stress, such as the TerraUSD collapse, has reinforced the need for stronger governance and reserve transparency.
2. Regulatory Landscape in South Korea
South Korea has been actively working to regulate digital assets post several high-profile collapses. The Financial Services Commission has introduced bills aimed at defining digital assets and protecting consumers, but a comprehensive regulatory regime for stablecoins remains incomplete.
3. Public Trust and Financial Stability
Public confidence plays a central role in the functioning of any currency. When users doubt whether they can redeem a stablecoin at its face value, the entire system becomes unstable. This is why the BOK insists that only entities with established reputations and regulatory oversight should handle currency issuance.
4. The Role of Technology vs. Trust
While blockchain technology offers transparency and immutability, it cannot substitute for trust in the issuer. Smart contracts can automate transactions, but they cannot guarantee asset backing or prevent human mismanagement, fraud, or insolvency.
5. Commercial Bank Involvement
By recommending that commercial banks take the lead, the BOK envisions a hybrid model where the innovation of crypto is merged with the stability of traditional finance. Such a model could enhance adoption while ensuring regulatory compliance and user protection.
6. Cross-Border Implications
Stablecoins often facilitate international transactions, especially in countries with volatile fiat currencies. However, unregulated stablecoins can also be used to bypass capital controls or engage in illicit finance, further justifying the BOK’s call for a bank-led, regulated framework.
7. User Education
The BOK also hinted at the importance of educating the public about the risks associated with stablecoins. Many users mistakenly believe these assets are as safe as fiat money, unaware of the operational and financial risks behind the scenes.
8. Potential for Systemic Innovation
With proper design and regulation, stablecoins could improve payment efficiency, reduce settlement times, and enhance financial inclusion. The key, as the BOK suggests, lies in ensuring these tools are developed within a robust institutional and legal framework.
9. Comparisons to Other Jurisdictions
Other central banks, including the European Central Bank and the Federal Reserve, have expressed similar concerns. Globally, there is a growing consensus that while stablecoins may serve useful functions, they must not be allowed to operate in regulatory vacuums.
10. Future of Digital Currency in Korea
South Korea’s progress toward a CBDC may eventually render private stablecoins obsolete. However, until such a system is ready, the BOK’s strategy appears aimed at minimizing risk through tight regulation and encouraging trusted institutions to lead innovation in digital finance.