South Koreas BOK Chief Warns of Won-Based Stablecoin Risks, Highlights Forex Management Challenges

SEOUL (Reuters) - The governor of South Korea's central bank, Rhee Chang-yong, has expressed concerns about managing capital flows in relation to the potential issuance of won-denominated stablecoins. While he is not opposed to the issuance of such stablecoins, he is concerned about the potential impact on the country's foreign exchange management.

Stablecoins, a type of cryptocurrency designed to maintain a constant value typically pegged 1:1 to the U.S. dollar, are widely used by crypto traders to move funds between tokens and are starting to be adopted by more and more companies. However, regulators in many countries are skeptical about cryptocurrencies as they are seen as speculative and as competitors to national currencies.

Rhee's comments come as South Korea's left-leaning President, Lee Jae Myung, is seen delivering on his election pledge to allow companies to issue won-based stablecoins. The ruling Democratic Party proposed earlier this month the Digital Asset Basic Act, designed to set up regulatory infrastructure needed to help local companies issue won-denominated stablecoins.

President Lee appointed a former crypto firm chief, Kim Yong-beom, as his chief policy officer in his first week in office, further boosting speculation that the government would take action to allow issuance of stablecoins backed by the Korean won. Kim has previously served as vice chairman of the Financial Services Commission before becoming CEO of Hashed Open Research, a think tank affiliated with crypto venture capital firm Hashed Ventures Inc.

Rhee has previously told reporters that allowing stablecoins to be issued by local companies, rather than the central bank, could significantly undermine the effectiveness of monetary policy and capital flow control. He emphasized that issuing won-based stablecoin could make it easier to exchange them with dollar stablecoin rather than working to reduce use of dollar stablecoin, which in turn could increase demand for dollar stablecoin and make it difficult for the central bank to manage foreign exchange.

The central bank governor's comments highlight the ongoing debate and potential challenges that South Korea faces in navigating the complex landscape of cryptocurrency regulation. As the country continues to grapple with how to balance the benefits of digital assets with the risks and challenges they present, it will be important for policymakers to carefully consider the implications of any decisions they make regarding won-denominated stablecoins.