After Luna's Echo: South Korea Forges Ahead with Digital Currency Amid Central Bank's Cautionary Stance

The South Korean government, under President Lee Jae Myung, is embarking on a significant digital finance initiative: the issuance of a won-pegged stablecoin, a move that places the nation at the forefront of the global digital currency evolution. This policy shift, however, has prompted immediate warnings from the Bank of Korea (BOK), which highlighted the past collapse of Terra and Luna cryptocurrencies. Stablecoins are digital currencies designed to maintain a stable value by being linked to conventional assets such as the U.S. dollar or gold, and they are gaining traction as potential tools for payment and value storage. Leveraging its robust tech sector and digitally literate populace, South Korea aims to foster a strong domestic digital asset market.

The government's proposal permits companies with a minimum capital of 500 million won (approximately $361,000) to apply for stablecoin issuance licenses, provided they have a secure asset reserve plan to back the coin's value. Major tech companies like Kakao and Naver have expressed interest, poised to utilize their existing electronic payment infrastructure. These entities are well-positioned to become early issuers, as stablecoin operations offer a profitable business model, deriving income from interest on short-term bonds purchased with users' funds, which also serve as reserves.

Despite the potential for profit, BOK Governor Rhee Chang-yong cautioned that unregulated stablecoin issuance could destabilize the financial system, accelerate the adoption of USD-pegged stablecoins, lead to capital outflows, and undermine monetary policy. The BOK also noted that, unlike central banks or traditional banks, stablecoin issuers lack mechanisms to prevent large-scale withdrawals. Consequently, the BOK has reportedly paused its own digital currency experiments, while eight South Korean commercial banks, including KB and Shinhan, are collaborating on a joint won stablecoin project.

The discussion of stablecoins often references the 2022 collapse of TerraUSD and its Luna token, which lost their USD peg and triggered a broader cryptocurrency market downturn. This failure stemmed from an algorithmic model lacking real asset backing. However, experts like Professor Choi Dong Beom of Seoul National University assert that stablecoins backed by tangible currencies are less susceptible to such collapses, citing the stability of "pegged" stablecoins like Tether's USDT and Circle’s USDC, which are secured by U.S. government bonds and highly liquid assets. These two companies collectively hold approximately $166 billion in U.S. bonds.

South Korea is not alone in this endeavor. The U.S. Congress recently passed the GENIUS Act, designed to create a federal framework for USD-pegged stablecoins, a move anticipated to bolster the dollar's digital financial influence. Even China, despite its past ban on cryptocurrency trading, is reportedly re-evaluating its stance. Huang Yiping, an advisor to the People's Bank of China (PBOC), indicated that Hong Kong's recent stablecoin legislation could provide an avenue for China to promote its currency in cross-border transactions, suggesting the exploration of yuan stablecoin issuance in Hong Kong, which operates under different capital controls than mainland China. Meanwhile, Hong Kong has finalized its stablecoin management law, effective August 1, establishing a clear regulatory framework aimed at attracting institutional investors. Priscilla Adams, director at Bullish, a digital asset exchange, believes this global shift toward regulated stablecoins could significantly increase the overall stablecoin market capitalization from $167 billion to around $255 billion. However, Hong Kong authorities emphasize that stablecoins are intended as a means of payment, not for investment or speculative purposes.