Bank of Korea Aims to Preempt Control of Won Stablecoin Issuance

Lee Jae-myung, presidential candidate of the Democratic Party of Korea, has sparked discussions on the activation of the won stablecoin

Lee Jae-myung, the presidential candidate for the Democratic Party of Korea, has sparked discussion on the activation of the won stablecoin. This topic has now escalated into a power struggle between the Bank of Korea and the Financial Services Commission.

The Financial Services Commission, which holds the authority to manage virtual assets, is seeking to formalize the supervisory framework for stablecoins through legislation. However, the central bank has intervened, citing the impact on monetary policy.

◇ The Bank of Korea: "The currency authority should hold power from the approval stage"

According to reports from the political sector on the 25th, the draft of the first bill on the 'Digital Asset Basic Act,' revealed by Min Byeong-deok, a member of the Democratic Party of Korea, on the 24th of last month, included provisions that grant the authority to approve the issuance of stablecoins to the Financial Services Commission rather than the Bank of Korea. This is interpreted as a signal that could influence the direction of institutionalization, being the first attempt to clarify the previously ambiguous managing entity as the Financial Services Commission.

The bill's conception reveals a strong determination on the part of the Financial Services Commission. Since last November, the Financial Services Commission has been operating a public-private legal advisory body, the 'Virtual Asset Committee,' led by former Deputy Chair Kim So-young, to lead discussions on legislation for digital assets, including stablecoins. Recently, the Commission has even begun the second phase of legislation for virtual assets, accelerating the establishment of a regulatory framework.

The reason the Financial Services Commission is keen on establishing a system is that stablecoins can impact financial stability. If stablecoins are used as payment methods like electronic money, they could replace bank deposits, weakening the bank's role as an intermediary for funds. From the perspective of financial authorities, it has become increasingly urgent to minimize the side effects of stablecoins and build a management system that allows for safe control within the institutional framework.

However, the central bank has expressed concerns regarding this movement. This is because the Bank of Korea is being excluded from the management framework of stablecoins. Since stablecoins are structured to link 1:1 with legal tender, such as the won, they could significantly impact the central bank's monetary policy. For this reason, the Bank of Korea has insisted that it should be at the center of management authority.

In particular, if unexpected shocks occur and the value becomes unstable, there could be a demand for redemption, which might lower the value of legal currency. If a private issuer of a won stablecoin fails to respond to redemption requests, liquidity pressures could be imposed on financial institutions or the payment system. This could lead to increased market interest rates and a shortage of liquidity in the short term, potentially placing a burden on exchange rates and the management of monetary policy.

In this context, Ko Kyung-cheol, head of the electronic finance team at the Bank of Korea, attended a seminar held by the Korean Financial Law Association and noted, "Stablecoins have a significant impact on the execution of central bank policies such as monetary policy, financial stability, and payment systems," adding that "it is necessary to grant substantial legal authority to the central bank at the approval stage regarding entry regulation for issuers."

◇ The U.S., E.U., and U.K. also grant supervisory powers to their central banks

This stance is similar to that of major central banks in other countries. Jerome Powell, the chair of the U.S. Federal Reserve, has repeatedly stated that stablecoins should be regarded as 'a digital form of bank deposits' and should not be issued without the Fed's approval. The Federal Reserve is exerting its influence by submitting opinions to Congress and testifying at hearings on related bills.

The European Central Bank (ECB) is also actively participating in the issuance of stablecoins. According to the Markets in Crypto-Assets Regulation (MiCa), which came into effect in June 2023, the ECB can refuse or demand the cancellation of approval if it determines that the issuance of stablecoins has a negative impact on monetary policy and financial stability.

The Bank of England holds supervisory and regulatory powers over systemically important digital payment assets (DSA). Specifically, the Bank of England can set capital requirements, reserves, and backup asset requirements, and impose rules on operators and service providers. Only the Financial Conduct Authority (FCA) holds issuance and supervisory powers over stablecoins that are not systemically important.

A Bank of Korea official explained that "stablecoins can replace legal currencies and threaten currency sovereignty, and they can also affect the effectiveness of monetary policy, presenting potential side effects in fields where the central bank cannot help but intervene," adding that "the Bank of Korea is not trying to monopolize authority but emphasizes the need to examine aspects that should be observed at the authorization stage."

Experts advise that a joint role of the Bank of Korea and the Financial Services Commission is necessary for the management of stablecoins. Choi Jae-won, a