stablecoins

Bank of Korea Governor Chang-yong Rhee warned that the rise of stablecoins could pose a significant threat to the traditional roles of central bank money and impact the effectiveness of monetary policies, local media reported.

Rhee made the statement at a conference on digital money in Seoul on Dec. 15. He added that central banks must step up their efforts to issue both a retail and a wholesale form of central bank digital currency to mitigate this looming threat.

Financial stability concerns

In his keynote speech, Rhee highlighted two main issues central banks must confront.

The first major concern is the rise of stablecoins and the existential threat they pose to central bank money, while the second is the lack of a proper regulatory framework for non-depository or non-financial institutions participating in the digital financial system.

Rhee emphasized that, despite their nomenclature, stablecoins often lack intrinsic stability and could diminish the role of central bank-issued money. This, in turn, could impair the effectiveness of traditional monetary policies.

Further complicating matters is the potential involvement of global networks like Visa or Mastercard, especially for countries like South Korea. This could lead to complexities in managing capital flows and maintaining monetary policy independence, Rhee added.

To address these challenges, Gov. Rhee suggested that central banks consider introducing central bank digital currencies (CBDCs), both in retail and wholesale formats.

He highlighted South Korea’s own efforts in this domain, including a pilot project for a retail CBDC system that leverages distributed ledger technology (DLT). The programmability of such currencies, allowing for complex, conditional transactions through smart contracts, was particularly noted as a significant advantage.

Moreover, the BOK, in collaboration with financial regulators and the Bank for International Settlements, is embarking on a second CBDC pilot project to explore wholesale CBDCs.

The project focuses on integrating a wholesale CBDC with tokenized bank deposits. It aims to explore the issuance of tokenized e-money by banks and non-bank financial institutions fully backed by wholesale CBDCs.

Echoing sentiments

The views of the Bank of Korea align with the sentiments of other major global central banks and financial institutions. For instance, the U.S. Federal Reserve has highlighted the volatility risks associated with stablecoins, especially those collateralized by other cryptocurrencies.

The Fed’s analysis points out the potential for market runs and the amplification of financial instability due to these digital assets. Similarly, the BIS has raised concerns about using stablecoins in cross-border payments.

According to a report by the BIS Committee on Payments and Market Infrastructures, stablecoins could challenge monetary sovereignty and financial stability, and impact seigniorage income. The report also suggests that the benefits of stablecoins could only be realized under stringent design and regulatory frameworks.