Stablecoin Fear Spreads: South Korea’s Central Bank Warns of Depeg Threat, Urges Bank Safeguards

South Korea’s central financial institution has issued a stark warning over the rising dangers of won-pegged stablecoins, cautioning that personal issuers might threaten financial stability if safeguards should not established.

The Bank of Korea (BOK) stated in a new report titled “Currency within the Digital Age: Harmony of Innovation and Trust” that the fast growth of stablecoin exercise poses systemic vulnerabilities, together with potential depegging occasions and illicit capital flows.

The central financial institution’s considerations come at a time when South Korea is actively debating find out how to regulate stablecoins.

Can South Korea Balance Stablecoin Innovation With Monetary Stability?

The BOK, led by Governor Rhee Chang-yong, reiterated its place that solely regulated monetary establishments, ideally banks, ought to challenge such belongings, arguing that “non-bank issuers might undermine financial management and capital administration.”

The central financial institution’s newest evaluation emphasised that the severity of reserve asset volatility might straight have an effect on the home monetary market, warning that improper collateral administration could result in depegging dangers much like these seen with international dollar-backed stablecoins.

The report highlighted dangers to financial stability from privately issued stablecoins, significantly those who may fail to take care of a one-to-one reserve ratio with the Korean received.

The BOK cautioned that improper reserve administration, international capital outflows, and speculative buying and selling might set off a loss of peg confidence, echoing the failures seen in algorithmic stablecoins akin to TerraUSD in 2022.

The report exhibits that stablecoins, whereas probably enhancing cost effectivity and supporting monetary innovation, might additionally undermine the effectiveness of financial coverage and disrupt international change administration.

It referred to as for sturdy reserve audits, issuance caps, and central oversight to forestall liquidity shocks.

The assertion follows months of mounting rigidity between the BOK and the federal government.

In June, South Korea’s ruling Democratic Party proposed the Digital Asset Basic Act, which might permit native companies to challenge stablecoins with a minimal capital requirement of 500 million received ($367,000) whereas making certain full redemption ensures.

The invoice, backed by President Lee Jae-myung’s pro-crypto administration, seeks to extend transparency and competitors within the native digital asset market.

However, the Bank of Korea has persistently opposed letting non-bank entities challenge won-pegged stablecoins.

At the time, Governor Rhee insisted that any digital foreign money backed by the received ought to stay underneath the central financial institution’s purview.

“Allowing non-public firms to challenge won-denominated stablecoins with out ample supervision might weaken financial management,” Rhee stated earlier this month.

The Stablecoin Race Is On — and Korea’s Banks Aren’t Waiting.

Despite central financial institution opposition, business banks have been making ready for a gradual rollout.

In June, eight main banks, together with KB Kookmin, Shinhan, Woori, and Nonghyup, formed a consortium to develop a joint won-linked stablecoin.

The consortium plans to pilot two issuance fashions: a trust-based system, the place buyer deposits are held individually as reserves, and a deposit-linked system, the place stablecoins mirror buyer deposits on a one-to-one foundation.

The banks say the initiative goals to “safe independence and competitiveness” amid fears that international dollar-backed stablecoins might dominate the home market.

The consortium’s creation marks a shift in South Korea’s monetary sector, which has traditionally maintained distance from digital belongings.

Bank executives privately acknowledge a “shared sense of disaster” that international dollar-pegged stablecoins might dominate the home market if native issuance lags behind.

Meanwhile, the Financial Intelligence Unit (FIU) is restructuring its anti-money laundering (AML) protocols to deal with the upcoming “institutionalization” of stablecoins.

The company has commissioned analysis on threat mitigation and is drafting new AML pointers for stablecoin issuers to be accomplished by December.

Officials stated the findings will type the inspiration for up to date oversight guidelines underneath the amended Specific Financial Information Act subsequent yr.

South Korea’s Stablecoin Bills Stall in Parliament as Agencies Vie for Control

Notably, the federal government can also be tightening coordination throughout businesses.

While President Lee beforehand proposed dismantling the Financial Services Commission (FSC), it remains active in crypto oversight and is anticipated to function the principle licensing authority for KRW-pegged stablecoins.

Pending payments from each ruling and opposition lawmakers would give the FSC energy to approve issuers, implement redemption requirements, and impose emergency orders in case of market disruption.

Political debate has slowed progress, nevertheless. Four separate draft bills are stalled in the National Assembly as lawmakers and regulators conflict over whether or not fintech and IT companies needs to be allowed to challenge stablecoins.

The BOK argues that such permission might result in the emergence of “non-public currencies” managed by giant tech conglomerates like Naver and Kakao, probably difficult the central financial institution’s financial authority.

Despite the gridlock, the stablecoin sector continues to draw world consideration.

In August, Circle CEO Heath Tarbert met with Governor Rhee and executives from main Korean banks and crypto exchanges to discuss cooperation on stablecoin infrastructure and regulatory frameworks.

Also, Solana Foundation partnered with Korean blockchain infrastructure company Wavebridge to construct a “compliance-ready” KRW-pegged stablecoin.

The debate unfolds in opposition to a backdrop of declining home crypto exercise.

According to the BOK’s Financial Stability Report, the Korean crypto market lost nearly $24 billion in value in the first half of 2025, with every day buying and selling volumes falling 80% to three.2 trillion received.

Retail traders have shifted to native equities amid stronger foreign money efficiency and rising regulatory uncertainty.