Stablecoin Fear Spreads: South Korea’s Central Bank Warns of Depeg Threat, Urges Bank Safeguards

Core Insights - The Bank of Korea (BOK) has issued a warning regarding the risks associated with won-pegged stablecoins, emphasizing the need for regulatory safeguards to maintain monetary stability [1][3][4] - The BOK's report highlights systemic vulnerabilities posed by the rapid expansion of stablecoin activities, including potential depegging events and illicit capital flows [1][5] Regulatory Concerns - The BOK advocates that only regulated financial institutions, preferably banks, should issue stablecoins to prevent undermining monetary control and capital management [3][6] - The central bank's analysis indicates that reserve asset volatility could significantly impact the domestic financial market, with improper collateral management leading to depegging risks [3][4] Risks to Monetary Stability - The report identifies risks from privately issued stablecoins that may not maintain a one-to-one reserve ratio with the Korean won, warning of potential loss of peg confidence [4][5] - The BOK calls for robust reserve audits, issuance caps, and central oversight to mitigate liquidity shocks and protect monetary policy effectiveness [5][6] Legislative Developments - South Korea's ruling Democratic Party has proposed the Digital Asset Basic Act, allowing local firms to issue stablecoins with a minimum capital requirement of 500 million won ($367,000) [6] - The proposed legislation aims to enhance transparency and competition in the digital asset market, although the BOK remains opposed to non-bank entities issuing won-pegged stablecoins [6][7]