The Bank of Korea, through its Governor Chang-yong Rhee, recently sounded the alarm on the rise of stablecoins, warning of risks to traditional central bank money roles. This warning raises crucial concerns about financial stability and the need for central banks to develop central bank digital currencies (CBDCs) in order to preserve monetary control.
Stablecoin threats and regulatory challenges
Chang-yong Rhee highlighted two major concerns at a digital currency conference in Seoul on December 15. Firstly, he highlighted the threat posed by stablecoins to the monetary base, pointing out that despite their name, these assets often lack intrinsic stability. This potential instability could compromise the effectiveness of traditional monetary policies. The governor also pointed to the lack 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 to financial stability.
Solutions proposed by Rhee and Initiatives from South Korea
To meet these challenges, Governor Rhee advocated a two-pronged approach. Firstly, central banks should step up their efforts to issue CBDCs, in both retail and wholesale forms. This approach, Rhee argued, would counter the growing threat of stablecoins by strengthening the presence of central currencies in the digital ecosystem. Rhee highlighted South Korea’s efforts in this area, highlighting a pilot project for a retail CBDC system based on distributed ledger technology (DLT).
The programmability of these currencies, enabling complex transactions via smart contracts, has been identified as a significant advantage. In collaboration with financial regulators and the Bank for International Settlements, the Bank of Korea is starting a second CBDC pilot project focusing 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 e-money by banking and non-banking institutions, fully backed by wholesale CBDCs.
Convergence of Global Views
The Bank of Korea’s positions reflect global concerns, with the US Federal Reserve highlighting the volatility risks associated with stablecoins, particularly those backed by other cryptocurrencies. Similarly, the Bank for International Settlements has raised concerns about the use of stablecoins in cross-border payments.
The Bank of Korea is taking proactive steps to counter the challenges posed by stablecoins by promoting the development of CBDCs. This initiative reflects a global trend in which central banks are recognizing the need for digital intervention to preserve financial stability and monetary sovereignty.
