tl;dr
The Bank of Korea proposes stricter controls on won-pegged stablecoins, requiring reserve deposits at the central bank to mitigate risks, cap issuer profits, and ensure systemic stability amid growing digital currency adoption.
**Bank of Korea Proposes Stricter Controls on Won-Pegged Stablecoins to Safeguard Users and Systemic Stability**
In a bid to mitigate risks associated with the growing stablecoin market, the Bank of Korea (BOK) has proposed that issuers of won-based stablecoins must deposit reserve assets directly at the central bank. This proposal, outlined in documents submitted to the National Assembly’s finance committee on October 1, marks a significant step toward stricter oversight of digital currencies tied to the South Korean won.
The BOK’s move comes as the government prepares to release its first draft bill on won-pegged stablecoins in October, aiming to establish a regulatory framework that prioritizes user protection and financial stability. Policymakers argue that tighter controls are essential to prevent private issuers from exploiting seigniorage-like profits—gains derived from the difference between the cost of issuing stablecoins and the returns on their reserve assets.
### **Mandatory Reserve Deposits to Curb Risks**
The BOK emphasized that requiring issuers to hold reserves directly at the central bank could reduce systemic risks, particularly during sudden redemption surges or uncontrolled money supply growth. Currently, stablecoin issuers often invest their reserves in low-risk assets like government bonds, generating returns above the central bank’s policy rate. By mandating deposits at the BOK, issuers’ profits would be capped at the policy rate, limiting potential arbitrage opportunities.
The central bank cited global precedents, noting that the U.S. Federal Reserve pays policy-rate interest on deposits but does not enforce mandatory reserve requirements. However, in the U.S., only Fed-approved entities are permitted to issue stablecoins. The BOK argued that aligning South Korea’s approach with such models would enhance transparency and integrate stablecoins more closely with traditional payment systems, ensuring redemption certainty and fostering user confidence.
### **Full Reserve Model and Regulatory Safeguards**
The BOK also advocated for a full reserve model, requiring issuers to deposit 100% of their liabilities in safe assets, akin to regulations for prepaid payment instruments. To oversee this, the bank proposed establishing a policy council to define eligible reserves, with the government retaining flexibility to refine rules through presidential decrees.
Additionally, the BOK stressed the need for cautious expansion, suggesting that initial stablecoin issuances should be led by bank consortia with robust compliance capabilities. This approach aims to mitigate risks such as regulatory arbitrage and potential disruptions to the financial system, as stablecoins could otherwise reshape industry dynamics.
### **Balancing Innovation and Stability**
While the proposal may reduce the profitability of stablecoin issuance and deter non-bank players, the BOK framed the tradeoff as necessary for long-term stability. By capping issuer profits and centralizing reserve management, the measures seek to prevent “coin runs”—mass redemptions that could destabilize the market.
The Financial Services Commission (FSC) is set to unveil its official legislative draft in October, signaling South Korea’s ambition to position itself as a leader in stablecoin regulation. As global regulators grapple with the implications of digital currencies, the BOK’s proposals underscore a proactive effort to balance innovation with safeguards, ensuring that stablecoins serve as a secure and stable complement to traditional finance.
With the upcoming bill, South Korea aims to strike a delicate equilibrium between fostering technological advancement and protecting the broader financial ecosystem from the risks of unregulated digital assets.