"Foreign Exchange Authorities' 'Verbal Intervention' Ineffective"...The True Nature of Stablecoins [Korea Economic Daily Koala]

'Permissionless', are we prepared?

As discussions about issuing a Korean won stablecoin accelerate, anticipation and concern are intersecting across various parts of society. Currently, public discourse remains focused on the peripheral issue of 'which entities should be allowed to issue, and with what restrictions.'

This overlooks the true nature of stablecoins. The essence of stablecoins lies in their permissionless nature. Regardless of who the issuer is, how much capital they have, or whether they are a financial institution, stablecoins are transacted permissionlessly. A 'coin' only exists if it can be freely traded without the approval of any specific party. While there is no legal definition of blockchain, most successful blockchain projects inherit the traits of decentralization and permissionlessness from Bitcoin. Assets lacking these characteristics are eventually shunned by the market and phased out. Whether the issuer is a government agency or a government-controlled financial institution, a KRW stablecoin must—and will—circulate freely.

What will happen once a KRW stablecoin is issued and distributed? This can be reasonably predicted by looking at what is already happening in the virtual asset ecosystem. Upon issuance, it will be immediately integrated into the global decentralized finance (DeFi) ecosystem operating on blockchain networks like Ethereum and Solana. Users can exchange the KRW stablecoin on decentralized exchanges (DEXs) or deposit it into liquidity pools to earn interest. The DeFi ecosystem, which has recovered from a slump between 2022 and 2024 alongside regulatory relaxations, once again offers yields that far exceed those available in the traditional financial sector, making it an attractive investment destination.

In addition, overseas centralized exchanges will also list KRW stablecoins. Similar to how Binance supports USDT trading pairs, trading pairs using the KRW stablecoin as a base asset may be created on overseas exchanges. Unlike domestic exchanges, which are more conservative, overseas platforms—where high leverage is the norm—might enable trading of other virtual assets using the KRW stablecoin.

These developments will have two major ripple effects. First is the emergence of a new exchange rate outside the control of the Korean government. If KRW and USD stablecoins are traded directly on high-liquidity overseas or decentralized exchanges, a new KRW–USD rate will be established between stablecoins. Here, domestic foreign exchange or financial authorities' 'verbal interventions' will have no effect.

The second is the possibility of large-scale domestic funds moving in search of high returns through 'yield farming.' DeFi liquidity pools generally provide an annual percentage yield (APY) of over 5%, with some even offering hundreds or thousands of percent as an initial incentive. By fully utilizing the composability—a hallmark of DeFi—investors can generate stacked yields across multiple protocols.

Back in 2021, the main reason vast amounts of money flowed into DeFi was for this very 'yield farming.' Exposure of KRW stablecoins to such DeFi yield farming could result in the inflow of domestic funds into the DeFi ecosystem on a scale that surpasses expectations. Considering that domestic demand deposit rates are in the 2% range, and CMA accounts are around 3%, a shift of funds to DeFi is likely.

One might argue that these changes should be viewed as a 'problem' and blocked by regulation. However, this is not realistic. By design, DeFi protocols are permissionless and their operators are beyond the regulatory reach of Korean financial authorities. For example, it is users—not Uniswap itself—who create liquidity pools on Uniswap, the world’s largest decentralized exchange. Neither Uniswap, its US-based entity, stablecoin issuers, nor the Korean government could stop this even if they wanted to, nor do they have such authority.

Seeking regulatory cooperation from the US government is also of little practical value. Recently, the US has entirely lifted its regulatory stance on DeFi and now adopts a highly blockchain- and DeFi-friendly approach—even considering exemptions from DeFi regulations. In this context, a KRW stablecoin issuer or the Korean government has little chance of successfully asking the US to restrict legitimate business operations of US entities.

A ban on issuance would be an even worse choice. A KRW stablecoin can be created not only by Korean entities or companies. Already, stablecoin issuance is legal in places like Hong Kong and Singapore, allowing foreign companies to issue KRW-pegged stablecoins. There are even specialized companies—such as Paxos, which issued PayPal’s PYUSD—that professionally facilitate stablecoin issuance. Even if we are unaware, some foreign firm may already be working on issuing a KRW stablecoin.

Just as Tether (USDT) did before as an 'offshore' stablecoin, a similar scenario could play out with KRW stablecoins: offshore stablecoins may preempt the market. It wouldn't be surprising if Tether announced the issuance of 'Tether Korean Won (KRWT)' tomorrow. The only way to prevent offshore KRW stablecoins from capturing the market is to quickly open up opportunities for credible domestic firms to take the lead.

Is the free cross-border circulation and use of a KRW stablecoin truly a 'problem'? This conflict arises from viewing 21st-century technology through the lens of the Foreign Exchange Management Act—enacted in the 1960s to efficiently manage limited foreign currency reserves at the stage of economic development (source: National Archives of Korea)—and its successor, the Foreign Exchange Transactions Act. Furthermore, it is rooted in remnants of a 'regulated economy' perspective, wherein all finance and foreign exchange transactions must occur under government control.

The perspective must change. Just as e-mails replaced paper documents as recognized electronic documents, laws and institutions must evolve alongside advances in technology and the market. The era is fast approaching in which AI agents will be directly linked to coin wallets, autonomously transferring, receiving, investing, and generating returns. The US has declared its ambition for 'leadership in digital assets,' and is poised to transform finance and foreign exchange through digital assets. What we urgently need is not a narrow debate over who should have the authority to issue and license KRW stablecoins. Instead, we must take broad, macro-level action to prepare for a future where KRW stablecoins circulate globally permissionlessly and for the tectonic shifts that will occur in finance and foreign exchange as a result.

Minseung Kim is...

A founding member and the head of the Korbit Research Center. He specializes in explaining complex events and concepts from blockchain and the crypto ecosystem in a way that is easy to understand, and helps people with differing perspectives understand each other. He has experience in blockchain project strategy planning and software development.

▶ This article is an external contributor's column introduced to provide various perspectives to newsletter subscribers interested in cryptocurrency and does not necessarily reflect the views of The Korea Economic Daily.