[Dasan Column] Stablecoins and Monetary Sovereignty

Fast remittance and low fees are advantages

Promotes competition in the payments market, enhancing efficiency

Excessive issuance of won-backed stablecoins

Concerns about adverse effects such as weakened monetary sovereignty

Sufficient consideration of macroeconomic impact

such as price control, fiscal revenue, and private sector lending

Professor Choi Jae-won, Department of Economics, Seoul National University

A stablecoin is a blockchain-based currency whose value is linked to legal tender such as the US dollar or Korean won. Bitcoin, even when its price increases, isn't used as currency due to high price volatility. Stablecoins, being price-stable, can serve as currency. They also have the advantages of fast remittance and low fees. The leading dollar stablecoin, Tether, has an issuance exceeding $100 billion, and the United States passed the Genius Act, a legal framework for stablecoins.

It is often said that dollar stablecoins can undermine a nation’s monetary sovereignty. Losing monetary sovereignty means that a country’s own currency is no longer used as a means of payment or as a unit of account. This occurs even when legal tender is present but people choose to use dollars instead. This is called dollarization and is seen in countries such as Türkiye and Nigeria.

Why do countries lose monetary sovereignty? The currencies of the previously mentioned countries have certain things in common: high inflation and unstable financial markets. When inflation causes a currency’s value to fall rapidly, people lose trust in their own currency and turn to the dollar.

Monetary sovereignty hinges upon a nation’s monetary policy. With sound policy stabilizing prices and ensuring financial stability, citizens can trust their own currency and preserve sovereignty. No matter how strong the dollar is, it cannot replace the national currency of a country with stable legal tender.

The reason for losing monetary sovereignty isn’t the existence of stablecoins. Stablecoins are merely a medium, a catalyst. Dollarization has existed long before stablecoins. The reason Venezuelans prefer the dollar is not a desire to use stablecoins, but because they want the stability and liquidity of the dollar. Euro-backed stablecoins are not widely used simply because they are not dollars.

It is not blockchain technology that is eroding monetary sovereignty, but the power of the dollar—as seen in El Salvador’s example. El Salvador declared Bitcoin as legal tender in 2021 but the result was a failure. Citizens preferred dollar bills. What people wanted was not their own currency, nor a blockchain-based currency, but dollar currency notes. The stability of the national currency is what preserves monetary sovereignty.

Won-backed stablecoins certainly have innovative potential, but cannot block the threat to monetary sovereignty posed by dollar stablecoins. The real threat comes not from stablecoins, but from the dollar’s dominance. In the past, dollars often circulated informally in South Korea through US military bases and other channels. It is natural that the dollar would be preferred when the local currency was not stable.

Some worry that the proliferation of dollar stablecoins will make dollar usage widespread. In reality, this is unlikely. Currency is not only a matter of legal requirement, but also of popular choice and demand. In a stable domestic currency system, there is no reason for widespread use of the dollar. For countries with sound fiscal and monetary policy, issues surrounding monetary sovereignty and stablecoins are less relevant. How should discussion about won-backed stablecoins proceed? Stablecoins are a major trend in global finance. They can drive greater efficiency by promoting competition in traditional payments.

The role of the Bank of Korea is now more crucial than ever. If won-backed stablecoins are issued, price stability may become harder to maintain. Stablecoins can constrain the Bank of Korea’s ability to implement monetary policy through open market operations. Excessive issuance of stablecoins could weaken the effectiveness of monetary policy and paradoxically destabilize monetary sovereignty.

The government also needs to carefully consider the economic implications of introducing stablecoins. Like the United States, there may be perceived advantages in boosting demand for government bonds. However, in the case of the won, with limited global demand, stablecoins could produce a crowding-out effect. While bond demand may increase, private sector lending could decrease, negatively affecting credit creation. Above all, seigniorage income could shift to the stablecoin issuer, directly reducing government fiscal revenue.

Won-backed stablecoins could bring innovation to the payments market and blockchain ecosystem. At the same time, they carry complex implications for monetary and fiscal policy and the broader national economy. Issues such as price control, government revenue, and private sector lending are all part of the broad macroeconomic impact. Careful thought and extensive discussion are needed.