Capital Market Research Institute: "To implement a KRW stablecoin, short-term treasury bonds with maturities of one year or less must be introduced"

Kim Pil-gyu, Research Fellow, Capital Market Research Institute

The world's No. 1 and No. 2 stablecoins also

hold reserves centered on short-term government bonds

Urgent establishment of a short-term government bond system

Need to organize management systems such as issuance methods

It has been argued that to introduce a KRW stablecoin, short-term treasury bonds with maturities of one year or less must be introduced. South Korea is the only country among those with developed government bond markets that has not introduced short-term treasury bonds.

In an issue report published last month, Kim Pil-gyu, Senior Research Fellow at the Capital Market Research Institute, said, "Major stablecoins in each country mostly hold short-term government bonds or related financial investment products as reserve assets," and added, "Legal and institutional improvements should be pursued to introduce short-term treasury bonds in line with global trends."

Stablecoin reserve assets include cash, deposits, short-term government bonds, government bond-collateralized repurchase agreements (RP), and government money market funds (MMF). The recently enacted U.S. Genius Act recognizes deposits as stablecoin reserve assets only if they are deposits at Federal Reserve Banks (FRB) or deposits placed with depository institutions that pay insurance premiums to the Federal Deposit Insurance Corporation (FDIC).

The core of the Genius Act is to provide safeguards that ensure the credibility of stablecoins. It defines stablecoins as "digital assets issued for payment or settlement and redeemable at a predetermined fixed amount." It also codified strict reserve requirements for all stablecoins. A representative example is requiring the issuer's CEO or CFO to disclose detailed information about the reserve composition and redemption policy on a monthly basis. It also requires an annual audit by a certified public accountant.

The European Union (EU) put in place a detailed regulatory framework for stablecoins two years ahead of the U.S. In June 2023, it introduced the Markets in Crypto-Assets Regulation (MiCA), subdividing stablecoins into electronic money tokens (EMT) pegged to fiat currencies and asset-referenced tokens (ART) pegged to multiple assets. It also mandated that issuers or companies ensure they have adequate reserve assets so token holders can exercise redemption rights at any time.

As of last month, there are about 170 types of stablecoins. The top two by trading volume, USDT (Tether) and USDC (Circle), account for about 90% of total trading. Until 2021, USDT held a significant portion of its reserves in high-risk assets such as commercial paper (CP). Recently, following the enactment of the Genius Act, it has reorganized its reserve composition to focus on short-term U.S. Treasuries and Treasury repurchase agreements. USDC is similar. Its reserves are composed of cash, short-term government bonds, and overnight Treasury repurchase agreements with major global banks.

Ultimately, the expansion of the stablecoin market translates into increased demand for U.S. short-term Treasuries. This is behind the Donald Trump administration's push to accelerate stablecoin legislation, led by the Genius Act.

Most G7 advanced economies operate short-term government bonds. The U.S. issues 1-, 3-, and 6-month and 1-year maturities. The U.K. is the same. France has a wider range of maturities: 4–11 weeks, 3 months, 11–22 weeks, 6 months, 30–47 weeks, and 1 year. Japan has two maturities: 6 months and 1 year.

Korea does not have short-term government bonds. Under the National Finance Act, the issuance and repayment of all government bonds must receive National Assembly approval, and approval is required based on the total amount issued. Under this framework, it is impossible to issue short-term government bonds because total issuance would increase significantly when refinancing. Although there are very short-term 3-month government bonds, their supply is so small that they are difficult to set as reserve assets.

Kim Pil-gyu explained, "There are alternatives such as government fiscal certificates and Bank of Korea monetary stabilization bonds as stablecoin reserve assets, but they have supply constraints," and added, "To introduce a KRW stablecoin, short-term government bonds must be introduced." He said that even to reduce government bond financing costs, the current strategy centered on ultra-long-term and long-term bonds should be adjusted. Kim emphasized, "It is necessary to amend the National Finance Act to promptly establish a short-term government bond system and, considering demand, organize the maturity structure, issuance method, and management system."

Reporter Lee Hae-seong ihs@hankyung.com