Stablecoin depeg crisis! South Korea's Central Bank warns that the $24 billion market is facing collapse

The Bank of Korea has issued a stern warning regarding the rising risks of stablecoins pegged to the Korean won, stating that without safeguards in place, private issuers could threaten monetary stability. In a new report titled “Currency in the Digital Age: Harmony of Innovation and Trust,” the BOK noted that the rapid expansion of stablecoin activities has introduced systemic vulnerabilities, including potential depeg events and illegal capital outflows.

South Korea's Central Bank Stance: Only Banks Can Issue Stablecoins

(Source: Bank of Korea)

The Bank of Korea, led by Governor Rhee Chang-yong, has reiterated its position that only regulated financial institutions (preferably banks) should issue such assets. The Bank of Korea insists that the stability of currency is built on the trust of traditional, regulated banks rather than merely on the technical commitments of private company codes. This position reflects the central bank's deep concern for monetary sovereignty and financial stability.

The Central Bank's latest analysis emphasizes that the severity of fluctuations in reserve assets may directly impact the domestic financial market, warning that improper collateral management could lead to depeg risks similar to foreign dollar-backed stablecoins. The report highlights the risks of privately issued stablecoins to monetary stability, particularly those that may not be able to maintain a one-to-one reserve ratio with the Korean won.

The Bank of Korea has warned that improper reserve management, foreign capital outflow, and speculative trading could lead to a loss of confidence in the exchange rate peg, reminiscent of the failures of algorithmic stablecoins like TerraUSD in 2022. The collapse of TerraUSD had a particularly severe impact on the Korean market, as its founder Do Kwon is Korean, and many Korean investors suffered significant losses during this incident. This painful experience has made the Bank of Korea particularly vigilant about the risks associated with stablecoins.

The report indicates that while stablecoins have the potential to improve payment efficiency and support financial innovation, they may also undermine the effectiveness of monetary policy and disrupt foreign exchange management. It calls for strict reserve audits, issuance limits, and central oversight to prevent liquidity shocks. Rhee Chang-yong stated earlier this month, “Allowing private companies to issue stablecoins denominated in Korean won without sufficient regulation may weaken currency control.”

South Korea's Central Bank Core Concerns About Stablecoins:

Depeg Risk: Volatility in reserve assets may cause the stablecoin to lose its 1:1 peg with the Korean won.

Capital Outflow: Illegal capital flows may bypass foreign exchange controls.

Monetary Policy Failure: Privately issued stablecoins may undermine the Central Bank's monetary control capabilities.

Systemic risk: Poor management may trigger turmoil in the financial markets.

Government and Central Bank Discrepancies: The Digital Asset Basic Bill Sparks Controversy

The tense relationship between the Central Bank of South Korea and the government has been escalating for months. In June this year, the ruling Democratic Party of Korea proposed the “Digital Asset Basic Act,” which would allow local companies in South Korea to issue stablecoins with a minimum capital requirement of 500 million KRW (367,000 USD), while ensuring full redemption guarantees. The bill has the support of President Lee Jae-myung's cryptocurrency government, aiming to enhance the transparency and competitiveness of the local digital asset market.

However, the Bank of Korea has consistently opposed allowing non-bank entities to issue stablecoins pegged to the Korean won. At that time, Governor Rhee Chang-yong insisted that any digital currency backed by the Korean won should be under the supervision of the Central Bank. This divergence reflects the fundamental contradiction between traditional financial regulators and cryptocurrency innovators: the former prioritizes financial stability and monetary sovereignty, while the latter emphasizes innovation and market competitiveness.

Political debates have hindered relevant progress. Due to disagreements among lawmakers and regulators on whether to allow fintech and IT companies to issue stablecoins, four separate bill drafts have been stalled in Congress. The Central Bank of Korea believes that such permission could lead to the emergence of “private currencies” controlled by large tech groups like Naver and Kakao, which may challenge the monetary authority of the Central Bank.

Although the government is strengthening coordination among various departments, the differences remain evident. Despite the South Korean President's previous proposal to dissolve the Financial Services Commission (FSC), the commission is still actively involved in cryptocurrency regulation and is expected to become the main licensing body for the stablecoin pegged to the Korean won. The bill being reviewed by both ruling party and opposition lawmakers will grant the Financial Management Commission the power to approve issuers, enforce redemption standards, and issue emergency orders during market turmoil.

8 banks rush into the Korean won stablecoin market

Despite opposition from the Central Bank, commercial banks are still preparing to gradually launch this measure. In June of this year, eight major banks, including the Bank of Korea, Shinhan Bank, Woori Bank, and NongHyup Bank, formed a consortium to jointly develop a stablecoin pegged to the Korean won. The alliance plans to trial two issuance models: a trust-based system where customer deposits are held separately as reserves; and a deposit-pegged system where the stablecoin reflects customer deposits on a one-to-one basis.

The bank stated that due to concerns that foreign dollar-backed stablecoins may dominate the domestic market, the plan aims to “ensure independence and competitiveness.” The establishment of the alliance marks a transformation in South Korea's financial industry, which has historically kept its distance from digital assets. Senior bank officials privately acknowledged a “shared sense of crisis” that if local issuance falls behind, foreign stablecoins linked to the dollar may dominate the domestic market.

This sense of crisis is not unfounded. Circle's USDC and Tether's USDT are the two largest stablecoins in the world, with a combined market value of over $200 billion. If these foreign stablecoins gain dominance in the Korean market, Korean financial institutions will lose control over the domestic payment system, and the Central Bank's monetary policy will also face challenges. Therefore, despite the differences with the Central Bank, commercial banks are still actively promoting the development of local stablecoins.

At the same time, the Financial Intelligence Unit (FIU) is restructuring its Anti-Money Laundering (AML) protocols to address the upcoming “institutionalization” of stablecoins. The agency has commissioned risk mitigation studies and is drafting new Anti-Money Laundering guidelines for stablecoin issuers, which are expected to be completed in December. Officials stated that these findings will lay the groundwork for updated regulatory rules under the revised Specific Financial Information Act next year.

International Giants' Layout and Market Status

Despite being in a stalemate, the stablecoin sector continues to attract global attention. In August, Circle CEO Heath Tarbert met with Governor Rhee Chang-yong and senior executives from major South Korean banks and cryptocurrency exchanges to discuss cooperation on stablecoin infrastructure and regulatory frameworks. Circle is the issuer of USDC, the world's second-largest stablecoin, and its interest in the South Korean market demonstrates the strategic importance of this market.

In addition, the Solana Foundation has partnered with the Korean blockchain infrastructure company Wavebridge to create a “compliant” stablecoin pegged to the Korean won. Solana is one of the world's leading high-performance blockchains, and its involvement brings advanced technological infrastructure to the Korean stablecoin market. This collaboration model between international giants and local enterprises may become the mainstream path for the development of stablecoins in Korea.

This debate unfolds against the backdrop of diminishing domestic crypto activities. According to the Bank of Korea's “Financial Stability Report”, the value loss of South Korea's cryptocurrency market in the first half of 2025 is nearly $24 billion, with daily trading volume dropping 80% to 3.2 trillion won. Amidst strong currency performance and increasing regulatory uncertainty, retail investors have shifted towards local stocks.

Nevertheless, South Korea remains one of the most active cryptocurrency markets in Asia, with over 10.8 million trading accounts, accounting for about 20% of its population. This high penetration rate means that stablecoin regulatory policies will affect the financial activities of millions of South Korean citizens, which is why the Central Bank, government, and commercial banks are all so focused on this issue.