Central bank's oversight of stablecoins to be abolished under proposed Korean legislation
South Korea's Digital Asset Landscape Shaping Up Amidst Caution and Controversy
South Korea is moving forward with its digital asset regulations, aiming to ease barriers to entry while protecting investors. The Democratic Party of Korea has introduced the Basic Digital Asset Act, which significantly reduces regulatory barriers, setting a modest capital requirement of won 500 million.
However, the Bank of Korea (BOK) has expressed several concerns regarding the proposed Act and the issuance of stablecoins in South Korea. The BOK's concerns revolve around monetary policy confusion, regulatory challenges, and currency sovereignty.
The BOK is concerned that multiple non-bank entities issuing won-denominated stablecoins could lead to confusion and complicate monetary policy implementation. This is due to the potential difficulty in distinguishing between official currency and private stablecoin issuances.
The central bank's pause on its central bank digital currency (CBDC) project, following the submission of a bill to allow stablecoin issuance, indicates a shift in focus towards regulating stablecoins rather than pursuing a CBDC. This highlights the regulatory complexities and potential oversight challenges associated with stablecoin issuance.
There are broader concerns about the impact of stablecoins on currency sovereignty, especially with the global trend of using U.S. dollar stablecoins. The fear is that widespread adoption of foreign stablecoins could undermine the use of the South Korean won in domestic and international transactions.
Representative Min Byeong-deok, who stated the intention was to ease barriers to entry while protecting investors, emphasized the need for speed due to an international race to host stablecoin issuers.
The proposed capital requirement for stablecoin issuers in the Basic Digital Asset Act is low by international standards. This is a decrease from a previously proposed won 5 billion capital requirement.
The Financial Services Commission, not the Bank of Korea (BOK), will approve stablecoin issuers. Crypto exchanges can participate in lending and choose which tokens to list under the proposed framework.
The Terra stablecoin, started by a Korean firm, collapsed in May 2022, causing around $40 billion in direct losses. The indirect effect of the Terra stablecoin collapse was far larger, triggering the failure of most centralized crypto lenders and a crypto market crash.
The Terra stablecoin collapse was a partial contributor to the FTX collapse, as sister company Alameda lost money. Hashed, a company involved in the Terra-Luna debacle, was closely involved in the Anchor Protocol, which offered high interest on Terra USD stablecoin deposits. Some described this scheme as ponzi-like.
Amidst these developments, it is worth noting that the BOK is currently conducting tokenized deposit and wholesale CBDC experiments. Central bank Governor Rhee Chang-yong visited the country's six largest banks to discuss digital currency projects. Most of the country's largest banks have announced plans to launch a joint stablecoin.
In conclusion, South Korea's digital asset landscape is shaping up amidst cautious optimism and ongoing concerns. The BOK's cautious approach to the development and regulation of digital assets underscores the need for careful consideration and balanced policies in this rapidly evolving field.
- The South Korean government, through the Democratic Party, has introduced the Basic Digital Asset Act, aiming to ease barriers to entry in digital assets while protecting investors, with a modest capital requirement of won 500 million.
- The Bank of Korea (BOK) has concerns about the proposed Act and the issuance of stablecoins in South Korea, expressing worries about monetary policy confusion, regulatory challenges, and currency sovereignty.
- The BOK's central bank digital currency (CBDC) project has been paused following the stablecoin bill submission, highlighting the regulatory complexities and potential oversight challenges associated with stablecoin issuance.
- Stablecoin issuers will be approved by the Financial Services Commission, not the Bank of Korea, enabling crypto exchanges to participate in lending and choose which tokens to list under the proposed framework.
- The Terra stablecoin, started by a Korean firm, collapsed in May 2022, causing around $40 billion in direct losses and a larger indirect effect, triggering the failure of most centralized crypto lenders and a crypto market crash.
- Amongst these developments, the BOK is conducting tokenized deposit and wholesale CBDC experiments, and most of the country's largest banks have announced plans to launch a joint stablecoin, indicating a momentum in the digital asset sector despite ongoing concerns.
