[Opinion] Stablecoins, a test for Korea's financial strategy

Preventing transformation into speculative assets

Measures needed to block illegal transactions

Kim Young-han, Professor of Economics, Sungkyunkwan University

Last July, U.S. President Donald Trump signed a bill to legalize stablecoins. As a result, stock prices of cryptocurrency-related companies surged not only in the United States but worldwide, and in Korea both companies and the government are actively pursuing stablecoin adoption. Now is the time for a sober review of whether we should rush to adopt them so as not to fall behind the United States, or whether we risk repeating the mistakes that led to a financial crisis when new derivative financial products were rampant in the past.

When cryptocurrencies including Bitcoin were first introduced, blockchain technology was expected to create a new financial order by dramatically reducing fees and transaction costs. However, the result was the formation of an uncontrollable digital speculative asset market unrelated to real assets or added value. The form of cryptocurrency promoted by President Trump and his family as a way to overcome this disappointment and side effects is precisely stablecoins. Unlike existing cryptocurrencies, which had no clear value basis beyond scarcity, stablecoins are explained as fixing value by backing them with real assets such as the dollar or the won to ensure stability, and using blockchain technology to virtually eliminate financial transaction fees.

The United States is in a crisis phase in which confidence in U.S. Treasury bonds has fallen below that of private corporate bonds due to government debt exceeding 120% of gross domestic product (GDP) and a fiscal deficit exceeding 7%. In this situation, the introduction and spread of stablecoins, which could virtually absorb Treasury bonds indefinitely, appears to be an inevitable expedient. Moreover, since President Trump's core supporters and the Trump family themselves have directly entered the cryptocurrency business, it seems Trump has little alternative. Is Korea really in a similar situation?

It is clear that blockchain technology can increase the efficiency of our financial industry and payment systems. However, considering the public nature of the payment system and the vulnerability of Korea's financial system to external shocks, adopting the U.S.-style stablecoin regime as is should be carefully reviewed. The greatest concern is that if stablecoins are designed to take on speculative asset characteristics like Bitcoin beyond being an efficient means of payment, they could cause instability not only in the payment system but across the entire financial system. Therefore, companies issuing and managing stablecoins should have no incentives for asset arbitrage and should be under financial authority supervision, and institutional adoption should preferably be expanded gradually centered on existing first-tier financial institutions.

As of the first quarter of this year, the volume of dollar-based stablecoin transactions in Korea approached 57 trillion won. However, considering market estimates that most of that is for profit-taking or illegal overseas remittances, measures to position stablecoins as an efficient means of payment rather than speculative assets like Bitcoin must come first. Also, since stablecoins are being used not only as black money for criminal or underground economy payments but also as channels for illegal foreign exchange transactions, precise institutional and technical safeguards that can fundamentally block such illegal transactions are essential. In particular, if unlimited trading between won-based stablecoins and dollar-based stablecoins is permitted, disruptions and instability in the foreign exchange market and the domestic financial market will be obvious.

To blindly ignore an untraveled path is a shortcut to being left behind. However, we already paid the price of hastily following others without preparing for clearly foreseeable risks during the past foreign exchange crisis. There must be no further repetition. What is needed now is direction, not speed. For the adoption of new technology to lead to innovation, building systems of stability and trust must come first.