The Governor of the Bank of Korea urged CBDCs to develop to compete with stablecoins

Chang-yong Rhee warned that stablecoins would harm central banks and advocated for CBDCs to maintain monetary control.

Bank of Korea Governor Chang-yong Rhee has warned that the rise of stablecoins could pose a significant threat to the traditional role of central bank money and affect the effectiveness of monetary policy, as reported by local media.

Rhee made the statement at the Digital Currency Conference in Seoul on December 15. He added that central banks must step up efforts to issue central bank digital currencies in both retail and wholesale forms to mitigate this looming threat.

Financial Stability Concerns

In his keynote speech, Rhee highlighted two main issues that central banks must face.

The first major concern is the rise of stablecoins and the existential threat they pose to central bank currencies, while the second major concern is the lack of an appropriate regulatory framework for non-depository or non-financial institutions involved in the digital financial system.

Rhee stressed that despite the nomenclature, stablecoins often lack intrinsic stability and could weaken the role of central banks in issuing money. This, in turn, could undermine the effectiveness of traditional monetary policy.

Complicating matters further is the potential involvement of global networks such as Visa or Mastercard, especially for countries like South Korea. Rhee added that this could complicate managing capital flows and maintaining monetary policy independence.

To address these challenges, Governor Rhee suggested that central banks consider introducing retail and wholesale forms of central bank digital currencies (CBDCs).

He highlighted South Korea’s efforts in this area, including a pilot project for a retail CBDC system utilizing distributed ledger technology (DLT). The programmability of such currencies, which allows complex conditional transactions through smart contracts, is particularly considered a significant advantage.

In addition, the Bank of Korea, in collaboration with financial regulators and the Bank for International Settlements, is launching a second CBDC pilot project to explore wholesale CBDCs.

The focus of the project is to integrate wholesale CBDCs with tokenized bank deposits. It aims to explore the issuance of tokenized e-money by banks and non-bank financial institutions that are fully supported by wholesale CBDCs.

Emotional Resonance

The BOK’s view is in line with that of other major central banks and financial institutions around the world. For example, the Federal Reserve highlighted the volatility risks associated with stablecoins, especially those that are collateralized by other cryptocurrencies.

The Fed’s analysis notes that these digital assets could trigger a market run and exacerbate financial instability. Similarly, the Bank for International Settlements (BIS) has expressed concerns about the use of stablecoins in cross-border payments.

According to a report by the Bank for International Settlements’ Committee on Payments and Market Infrastructures, stablecoins could challenge monetary sovereignty and financial stability and affect seigniorage revenues. The report also shows that the benefits of stablecoins can only be realized under a strict design and regulatory framework.