South Korean President Lee Jae-myung is pushing forward with legalising stablecoins through the introduction of the Digital Asset Basic Act, a significant legislative initiative unveiled just days after his election victory. This new framework aims to enhance the transparency of cryptocurrency assets while fostering competition among local players in the cryptocurrency landscape.
The Digital Asset Basic Act is a part of Lee’s broader pro-cryptocurrency strategy and sets out provisions allowing domestic firms to issue stablecoins that are pegged to traditional fiat currencies. To do so, issuers must have a minimum equity of 500 million won (approximately AU$564,000) and receive approval from the Financial Services Commission. Furthermore, these issuers will be obligated to maintain fiat reserves and guarantee the redemption rights of holders.
Lee, who secured approximately 49.4% of the votes in the recent election held on June 4, has ambitious plans for the crypto sector. He has expressed interest in paving the way for spot cryptocurrency exchange-traded funds (ETFs) and has hinted at allowing the national pension fund to invest directly in cryptocurrencies, creating a more comprehensive investment landscape.
However, the initiative has met with resistance from the Bank of Korea. Governor Rhee Chang-yong has voiced concerns that privately issued stablecoins may undermine national monetary policy and disrupt economic stability. The Bank has advocated that any stablecoin pegged to the Korean won should come under its strict oversight, setting the stage for potential clashes between the presidency and the central bank’s regulatory stance.
### Tension with Treasury Markets
The current state of the short-term Treasury market, which has approximately US$6 trillion (AU$9.2 trillion) in outstanding bills, offers stability and security within the US financial ecosystem. Stablecoins traditionally rely on significant backing from these Treasury instruments. Major players such as Tether and Circle currently hold a combined US$166 billion (AU$254 billion) in Treasuries, a figure that is expected to rise under the new regulatory framework.
Despite this dependence, analysts are sounding alarms. Cristiano Ventricelli, a Moody’s analyst, warned that any erosion of confidence in stablecoins could lead to rapid liquidation of Treasury bills. Such a situation may trigger substantial sell-offs and could disrupt broader financial markets, leading to declines in Treasury prices and instability in fixed-income sectors.
“A problem in the stablecoin sector could spill over into broader financial markets,” Ventricelli stated, emphasizing the interconnectedness of these financial instruments and the potential for widespread repercussions.
This situation illustrates the precarious balance that regulators, issuers, and the Bank of Korea must navigate as stablecoins gain prominence in the financial landscape. While Lee’s administration advocates for innovation and increased market participation, the inherent risks associated with stablecoins—especially concerning macroeconomic control and market stability—loom large, necessitating a careful regulatory approach moving forward.
In summary, South Korea’s efforts to legalise stablecoins through the Digital Asset Basic Act reflect a significant shift towards embracing cryptocurrency at a national level. However, the interplay between regulatory ambitions and financial stability remains a critical consideration, with both the government and the Bank of Korea wrestling with the implications of these new developments.
