Bank of Korea Warns on Stablecoin Depeg Risks, Says Banks Should Lead

In brief

In a report Monday, the Bank of Korea challenged the notion that technology alone can ensure currency stability.
The central bank cited depegging risks, noting that major stablecoins like USDC fell to $0.88 during Silicon Valley Bank’s 2023 collapse.
Meanwhile, South Korean companies are advancing won-pegged stablecoin pilots, including BDACS’s successful KRW1 test on the Avalanche blockchain.

South Korea’s central bank has sounded the alarm on won-denominated stablecoins, warning private issuers lack the institutional trust required to maintain stable currency and urging traditional banks to take the lead instead.

The Bank of Korea (BOK) released a report Monday outlining major risks associated with won-pegged stablecoins, comparing them to historical currency failures from America’s mid-19th-century free-banking era to Korea’s own Dangbaekjeon crisis under King Gojong.

“Currency operates not on technology, but on trust,” the report says, challenging proponents who believe blockchain innovation alone can ensure stability.

Depeg concerns

The BOK’s primary concern centers on “depegging risk,” the frequent breaking of stablecoins’ promises to maintain 1:1 value with their underlying currency.

The report cites the Terra/Luna crash, saying “the algorithm that promised to maintain ‘1 coin = 1 dollar’ collapsed in just a few days, causing countless investors to lose their assets overnight.”

Even major dollar-pegged coins are vulnerable, the bank noted, citing USDC’s slide to $0.88 during the Silicon Valley Bank crisis, which caused several crypto firms into contingency mode.

The central bank noted that concerns about non-dollar stablecoins with limited circulation are “particularly serious,” with even euro-pegged stablecoins, backed by the second-largest reserve currency, described as “particularly vulnerable.”

Despite its warnings, the BOK pointed out it “does not seek to block innovation; rather, it seeks safe and sustainable innovation.”

“When discussing won-denominated stablecoins, which aspire to be a new currency, the first question to be asked is not ‘Is the technology feasible?’ but ‘Is trust possible?’” the report added.

In September, digital asset custodian BDACS launched KRW1, the country’s first fully regulated won-backed stablecoin, in partnership with Woori Bank. The stablecoin is built atop the Avalanche blockchain, selected in part because of its recognition by Korea’s Internet & Security Agency for “reliability in public-sector applications.”

Bank-first approach

Korea’s central bank says private issuers must possess a high level of “publicness” and establish institutional mechanisms to offset damage if the “1 coin equals 1 won” promise is broken.

“If the issuer fails to properly hold the reserve assets, or if the value of the reserve assets declines due to risky investments, the promise cannot be kept,” the report states, highlighting the risks of private-sector issuance without adequate safeguards.

The report calls for inter-agency coordination on stablecoin policy while advancing Project Hangang, the BOK’s pilot for bank-issued deposit tokens on its own blockchain infrastructure.

In June, BOK Deputy Governor Ryoo Sang-dai said it is “desirable to initially allow stablecoin issuance primarily through banks,” then “gradually expand” to non-banks, amid a sharp trading surge and sizable outbound flows via stablecoins.

In September, the ruling Democratic Party launched a “Digital Asset Task Force” pledging to push through stablecoin legislation by year’s end to “protect Korea’s monetary sovereignty.”

“The BOK is still stuck in the outdated frame of ‘Trust’ while the world is advancing to ‘Trust-less’ or ‘Permission-less’ on-chain economy backed by technology,” Rich O., APAC regional manager at OneKey, told Decrypt.

“It does not surprise many in Korea that the BOK holds the stance, but the trust and value of the fiat currency has already started collapsing gradually, as shown in the recent soaring prices of Gold, BTC, S&P500, and even KOSPI,” he added.

Since Korea is “not included anywhere in the global value chain,” Rich O. added, “KRW stablecoins are the only opportunity” for the country to enter it.