Bank of Korea Governor Lee Chang-yong has issued a stark warning about the potential risks of allowing non-bank companies to issue Korean won-pegged stablecoins, cautioning that such a move could lead to “currency chaos” not seen since the 19th century.
Speaking at a press conference following the central bank’s decision to maintain its base interest rate at 2.50%, Governor Lee drew parallels to the Free Banking Era in the United States that began in 1837, when thousands of different banknotes circulated at varying discounts, creating widespread economic confusion and instability.
The governor’s concerns come as South Korea pushes forward with President Lee Jae-myung’s campaign promise to promote won-based stablecoins as part of a broader digital payment initiative. This political momentum has already sparked significant market interest, with major payment service providers and banking institutions rushing to submit trademark applications for stablecoin ticker symbols.
Disruption And Challenges
However, Governor Lee emphasized that allowing multiple non-banking institutions to issue stablecoins could fundamentally disrupt South Korea’s monetary policy framework. “In such a situation, it is difficult to implement monetary policy, and there will be the side effect of having to go through the process of returning to the central banking system again,” he stated.
The central bank chief warned that excessive stablecoin issuance could make it challenging to control the country’s money supply, potentially compromising the Bank of Korea’s ability to set appropriate interest rates and maintain economic equilibrium.
Collaborative Solutions
The stablecoin debate has exposed underlying tensions between South Korea’s monetary authorities and the current political leadership’s digital asset agenda. While President Lee’s administration pushes for won-based stablecoin legalization, the Bank of Korea has historically favored more controlled approaches such as Central Bank Digital Currencies (CBDCs) or tokenized deposits.
Governor Lee stressed that the stablecoin issue cannot be resolved by the central bank alone, emphasizing the need for collaborative decision-making among relevant government ministries. The complexity of the matter has led to concerns about potential conflicts with foreign exchange liberalization policies and the impact on traditional banking sector profit structures.
“Allowing won stablecoins indiscriminately could clash with foreign currency exchange policies, and delegating payment and settlement services to non-banks will disrupt the profit model of existing banks,” he noted.
In response to these regulatory challenges, the Bank of Korea has announced its intention to adopt a regulatory sandbox approach, allowing for controlled experimentation with won-based stablecoin issuance. This framework will enable testing of new financial products in a regulated environment while ensuring compliance with existing rules without stifling innovation.
The ruling Democratic Party has already proposed the Digital Asset Basic Act, which aims to regulate stablecoin issuance and enhance transparency in the crypto industry. However, the legislation’s potential to allow non-bank entities to participate has intensified the debate about regulatory authority between the Bank of Korea and the Financial Services Commission.
As South Korea navigates this delicate balance between financial innovation and monetary stability, the outcome of the stablecoin debate could set important precedents for other nations grappling with similar digital asset regulatory challenges.