South Korea plans to legalize stablecoins issuance

The party of South Korea’s President Lee Jae-myung, just days after his election victory, has introduced the Digital Asset Basic Act, a legislative framework designed to permit local companies to issue stablecoins under defined conditions.

Lee, a progressive leader who narrowly defeated his conservative opponent in last week’s presidential election, had made stablecoin regulation one of his biggest talking points in his campaign. He argues that allowing regulated issuance of asset-backed digital tokens will boost transparency, expand the domestic crypto sector, and place South Korea ahead of several countries in matters of digital finance.

The legislation was submitted to parliament on Tuesday, with provisions that could see South Korean firms issue stablecoins if they meet a minimum equity capital requirement of 500 million won, equivalent to about $367,876. These issuers would also be required to carry sufficient reserves to guarantee refunds and security of customer funds.

Post-election South Korea: Crypto regulatory clarity

South Korea is recognized as one of the most active crypto markets globally. Upbit, the top exchange in the Asian nation by trading volume, has a daily average of $1.5 billion trades. 

Of an estimated 18 million South Koreans, roughly one-third of the population, are digital asset traders. Daily volumes on local exchanges often exceed those on the nation’s major stock indexes, the Kospi and Kosdaq.

Just as in the US, where Congress is set to vote on its own stablecoin bill this week, South Korea’s proposed legislation mandates that all asset-linked digital currencies, including stablecoins, must receive approval from the Financial Services Commission (FSC), the country’s top financial regulator. 

According to Bank of Korea data cited by Yonhap News, transactions involving major stablecoins such as USDT, USDC, and USDS on five domestic exchanges totaled 57 trillion won in the first quarter alone.

Despite the enthusiasm surrounding stablecoins, Lee’s initiative is facing institutional pushback, specifically from the country’s central bank. Bank of Korea Governor Rhee Chang-yong believes stablecoins issued by nonbank entities will have monetary implications for South Korea’s monetary policies.

“These instruments, if allowed outside regulated institutions, could serve as vehicles for capital regulation arbitrage,” Rhee told reporters in a press conference in May.

The governor wants BOK to take responsibility for any won-pegged stablecoin, insisting that Korea should not take capital flow risks “lightly.”

“Financial stability concerns demand that we consider capital controls more thoroughly before allowing non-bank entities into the payments sector. This concern is shared by other Asian economies as well,” he concluded.

Financial markets respond to legislation proposal

After news of Lee’s stablecoin proposal was published on several outlets, shares of financial services firm KakaoPay Corp. surged as much as 18% on Tuesday, its highest daily gain since January 2024. 

The period also boded well for the broader KOSPI index, which closed at 2,882, a gain of 26 points, or 0.92%, from the previous session. Over the past four weeks, the index is up 10.53%.

However, not all observers are convinced that the policy shift will translate into tangible corporate gains. In a client note, JPMorgan analysts Stanley Yang and Jihyun Cho were far less confident about the rally in Kakao-affiliated stocks. 

“The rally in Kakao-related shares is fundamentally unjustifiable, as any concrete benefit from Lee’s stablecoin policy remains uncertain,” they wrote.

Fears from the collapse of TerraUSD, a South Korean-created algorithmic stablecoin that failed in 2022, are also still clouding the chances of crypto firms to succeed in the country. The implosion erased $40 billion in value and is a painful memory for many South Korean investors. 

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