Bank of Korea Warns on Stablecoin Depeg Risks, Says Banks Should Lead

The central bank of South Korea sounded the alarm on wine stablecoinswarning that private issuers lack the institutional confidence needed to keep the currency stable and urging traditional banks to take the lead instead.

The Bank of Korea (BOK) published a report Monday outlining the major risks associated with twenty-pegged stablecoins, comparing them to historical currency failures from America’s free banking era in the mid-19th century to the Dangbaekjeon crisis in Korea under King Gojong.

“Currency operates not on technology, but on trust,” says the report, challenging proponents who believe that blockchain innovation alone can ensure stability.

Depeg worries

The BOK’s primary concern centers on the “risk of depegging,” the frequent breaking of promises by stablecoins to maintain 1:1 value with their underlying currency.

The report mentions the Earth/Moon Crashsaying “the algorithm that promised to keep ‘1 coin = 1 dollar’ collapsed in a matter of days, causing countless investors to lose their assets overnight.”

Even major currencies pegged to dollars are vulnerable, the bank said, citing USDC slide to $0.88 during the Silicon Valley Bank Crisiswhich has caused many crypto companies to fall into line.

The central bank noted that concerns about non-dollar stablecoins with limited circulation are “particularly serious”, with even euro-pegged stablecoins, backed by the second largest reserve currency, described as “particularly vulnerable”.

Despite its warnings, the BOK said it “does not seek to block innovation; rather, it seeks safe and sustainable innovation.”

“When discussing bitcoin-denominated stablecoins, which aspire to be a new currency, the first question that should be asked is not ‘Is the technology feasible?’ but “Is trust possible?” added the report.

In September, the custodian of digital assets BDACS launched KRW1the country’s first fully regulated won-backed stablecoin, in partnership with Woori Bank. The stablecoin is built on the Avalanche blockchain, chosen in part because of its recognition by the Korea Internet and Security Agency for “reliability in public sector applications.”

The approach of the first bench

Korea’s central bank says that private issuers​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ have a high level of “publicity” and establish institutional mechanisms to compensate for damages if the “1 coin equals 1 won” promise is broken.

“If the issuer fails to properly maintain the reserve asset, or if the value of the reserve asset decreases due to risky investments, the promise cannot be kept,” the report says, highlighting the risks of private sector issuance without adequate safeguards.

The report calls for inter-agency coordination in stablecoin policy as it moves forward with the Hangang Project, the BOK’s pilot for self-issued bank-issued deposit tokens. blockchain infrastructure.

In June, the vice governor of BOK Ryoo Sang-dai he said it is “Desirable to initially allow stablecoin issuance primarily through banks,” then “gradually expand” to non-banks, amid strong business growth and notable outflows via stablecoins.

In September, the ruling Democratic Party launched a “Digital Assets Task Force” push for stablecoin legislation at the end of the year to “protect Korea’s monetary sovereignty.”

“The BOK is still stuck in the old framework of ‘Trust’ as the world moves towards the ‘Trustless’ or ‘Permissionless’ chain economy supported by technology,” said Rich O., APAC Regional Director at OneKey. Decrypt.

“It does not surprise much in Korea that the BOK maintains the position, but the confidence and value of the fiat currency has already begun to gradually collapse, as shown in the prices of gold, BTC, S&P500 and even KOSPI,” he added.

Since Korea is “not included anywhere in the global value chain,” Rich O. added, “KRW stablecoins are the only opportunity” for the country to enter.