Introduction
South Korea’s central bank has issued a stark warning about the risks of privately-issued won-denominated stablecoins, challenging the notion that blockchain technology alone can ensure currency stability. The Bank of Korea emphasized that currency reliability depends on institutional trust rather than technological innovation, citing historical currency failures and recent stablecoin depegging events as evidence of inherent vulnerabilities in private-sector issuance.
Key Points
- The BOK compares stablecoin risks to historical currency failures including America's 19th-century free-banking era and Korea's Dangbaekjeon crisis
- Major dollar-pegged stablecoins like USDC proved vulnerable during banking crises, falling to $0.88 during Silicon Valley Bank's collapse
- The central bank is advancing Project Hangang, its own pilot for bank-issued deposit tokens while calling for inter-agency coordination on stablecoin policy
Trust Over Technology: The BOK's Core Argument
The Bank of Korea’s Monday report delivers a fundamental challenge to the cryptocurrency industry’s core premise, asserting that “currency operates not on technology, but on trust.” This principle underpins the central bank’s skepticism toward won-pegged stablecoins issued by private entities, drawing parallels to historical currency failures ranging from America’s mid-19th-century free-banking era to Korea’s own Dangbaekjeon crisis under King Gojong.
The report directly confronts blockchain proponents who believe technological innovation alone can ensure stability, stating that when discussing won-denominated stablecoins aspiring to be new currencies, “the first question to be asked is not ‘Is the technology feasible?’ but ‘Is trust possible?'” This philosophical stance forms the foundation of the BOK’s cautious approach toward private stablecoin issuance, despite acknowledging it “does not seek to block innovation; rather, it seeks safe and sustainable innovation.”
Depegging Dangers: Lessons from Recent Crises
The BOK’s primary concern centers on “depegging risk,” highlighting how stablecoins frequently break their promises to maintain 1:1 value with underlying currencies. The report cites the dramatic Terra/Luna collapse as a cautionary tale, noting that “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 established dollar-pegged stablecoins proved vulnerable during banking crises, with the report specifically mentioning USDC’s slide to $0.88 during the Silicon Valley Bank collapse in 2023, which forced several crypto firms into contingency mode. The central bank expressed particular concern about non-dollar stablecoins with limited circulation, describing even euro-pegged stablecoins backed by the world’s second-largest reserve currency as “particularly vulnerable.”
The BOK warned that private issuers often lack adequate safeguards, stating “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.” This vulnerability underscores the need for robust institutional mechanisms to protect against depegging events that could harm investors and disrupt financial stability.
Bank-Led Approach vs. Private Innovation
While private companies like BDACS advance won-pegged stablecoin pilots, including the successful KRW1 test on the Avalanche blockchain in partnership with Woori Bank, the BOK advocates for a bank-first approach to stablecoin issuance. The central bank insists 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.
BOK Deputy Governor Ryoo Sang-dai reinforced this position in June, stating it is “desirable to initially allow stablecoin issuance primarily through banks,” then “gradually expand” to non-banks. This cautious approach comes amid a sharp trading surge and sizable outbound flows via stablecoins, prompting concerns about monetary sovereignty and financial stability.
The central bank is advancing its own Project Hangang, a pilot for bank-issued deposit tokens on its proprietary blockchain infrastructure, while calling for inter-agency coordination on stablecoin policy. Meanwhile, South Korea’s ruling Democratic Party has launched a “Digital Asset Task Force” pledging to push through stablecoin legislation by year’s end to “protect Korea’s monetary sovereignty,” indicating growing political attention to the issue.
Industry Pushback and Global Context
The BOK’s stance has drawn criticism from cryptocurrency industry representatives who argue the central bank is missing the fundamental shift toward trustless systems. Rich O., APAC regional manager at hardware wallet maker OneKey, told Decrypt that “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. further argued that “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 contended that since Korea is “not included anywhere in the global value chain,” KRW stablecoins represent “the only opportunity” for the country to enter it, suggesting the BOK’s cautious approach might hinder South Korea’s participation in the evolving digital economy.
This tension between traditional financial oversight and blockchain innovation reflects a broader global debate as central banks worldwide grapple with balancing financial stability against technological advancement. The BOK’s report positions South Korea at a critical juncture, seeking to harness blockchain innovation while maintaining the institutional safeguards it deems essential for currency stability and public trust.
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