The Bank of Korea, through its governor Chang-yong Rhee, recently sounded the alarm over the rise of stablecoins, warning of risks to the traditional roles of central money. This warning raises critical concerns about financial stability and the necessity for central banks to develop central bank digital currencies (CBDCs) to preserve monetary control.
Stablecoin threats and regulatory challenges
Chang-yong Rhee highlighted two major concerns during a digital currency conference in Seoul on December 15. First, he shed light on the threat that stablecoins pose to central money, noting that despite their name, these assets often lack intrinsic stability. This potential instability could undermine the effectiveness of traditional monetary policies. The governor also pointed out the absence of an appropriate regulatory framework for non-depository institutions participating in the digital financial system. This regulatory gap, combined with the threat of stablecoins, creates a set of challenges for financial stability.
Solutions proposed by Rhee and South Korea’s initiatives
To address these challenges, Governor Rhee advocated a dual approach. First, central banks should intensify their efforts to issue CBDCs, in both retail and wholesale forms. This approach, according to Rhee, would counter the growing threat of stablecoins by reinforcing the presence of central currencies within the digital ecosystem. Rhee highlighted South Korea’s efforts in this area, showcasing a pilot project for a retail CBDC system based on distributed ledger technology (DLT).
The programmability of these currencies, allowing complex transactions through smart contracts, was identified as a significant advantage. In collaboration with financial regulators and the Bank for International Settlements, the Bank of Korea is launching a second CBDC pilot project focused on wholesale CBDCs. This project aims to explore the integration of a wholesale CBDC with tokenized bank deposits, paving the way for the issuance of tokenized electronic money by banking and non-banking institutions, fully backed by wholesale CBDCs.
Convergence of global views
The positions of the Bank of Korea mirror global concerns, with the US Federal Reserve highlighting volatility risks associated with stablecoins, particularly those backed by other cryptocurrencies. Similarly, the Bank for International Settlements has raised concerns regarding the use of stablecoins in cross-border payments.
The Bank of Korea is taking proactive measures to counter the challenges posed by stablecoins by promoting the development of CBDCs. This initiative reflects a global trend where central banks recognize the need for digital intervention to safeguard financial stability and monetary sovereignty.
