Today the ruling Democratic Party of Korea introduced the Basic Digital Asset Act at a press conference. The draft legislation aims to allow non banks and payment providers to issue stablecoins, and also relaxes rules for crypto exchanges, enabling them to participate in lending and choose which tokens to list.
Under this proposed framework, instead of the Bank of Korea (BOK) approving stablecoin issuers, that authority will fall to the Financial Services Commission. The legislation also significantly reduces regulatory barriers, setting a modest capital requirement of won 500 million ($365,000) for issuers, down from a previously proposed won 5 billion.
“Digital assets have a low equity capital ratio because they are structured to guarantee a refund based on reserves,” said Representative Min Byeong-deok. He said the intention was “to ease the barriers to entry into the system while clearly establishing measures to protect investors.” Mr Min emphasized the need for speed, implying there’s an international race to host issuers.
Central bank stablecoin concerns
However, the central bank has pushed back against these proposals, with Yonhap News describing the BOK’s reaction as ‘panic’. It reported that BOK had planned to hold a conference on stablecoins to make its case that indiscriminate issuance of won-denominated stablecoins could result in coin runs, which could impact the competitiveness of the won.
The central bank’s concerns are well-founded. The proposed capital requirement is low by international standards, and capital requirements serve two critical purposes: ensuring companies have sufficient operational money that they aren’t tempted to misappropriate client funds; and providing a financial buffer when things go wrong. For example, if securities in the reserves lose some of their value. Additionally, Korea has a troubled history with stablecoins. The Terra stablecoin, albeit an algorithmic one, was started by a Korean firm. It collapsed in May 2022 causing around $40 billion in direct losses. The indirect effect was far larger, triggering the failure of most centralized crypto lenders and a crypto market crash. It was also a partial contributor to the FTX collapse, as sister company Alameda lost money.
This policy shift reflects broader changes in government leadership and crypto policy direction, following the recent election. It aligns with previous proposals from Kim Yong-beom, the former CEO of Hashed Open Research and the new Director of Policy for the Office of the President. Hashed played a role in the Terra – Luna debacle. It was closely involved in the Anchor Protocol, which offered high interest of 19.5% on Terra USD stablecoin deposits when the normal dollar rate was 1%. This drove the expansion of the Terra – Luna ecosystem – as the volume of stablecoins grew, so did the value of the Luna cryptocurrency. Anchor used grants of Luna crypto to fund the interest payments in a scheme that some described as ponzi-like.
Banks want to issue stablecoins too
This isn’t the first time in the past month that stablecoins have caused consternation for the central bank. BOK is currently conducting tokenized deposit and wholesale CBDC experiments, and in the middle of those trials most of the country’s largest banks publicly announced plans to launch a joint stablecoin. Local news outlets reported that central bank Governor Rhee Chang-yong personally visited the country’s six largest banks to discuss digital currency projects.
