Korean banks race to test stablecoins as Seoul’s digital currency rules remain stuck

While major economies are moving quickly to bring stablecoins into the regulatory fold, related legislation in Korea has struggled to gain momentum.

Efforts to establish a regulatory framework for won-denominated stablecoins, which began as a presidential campaign pledge by President Lee Jae Myung, have stalled just before the government bill was to be submitted to the National Assembly, as disagreements persist over issues such as who should be allowed to issue them.

Stablecoins are digital assets designed to maintain a relatively stable value by being pegged to fiat currencies such as the dollar or won. This allows them to function much like cash; for example, a won-denominated stablecoin could be designed so that one coin is worth 1,000 won (75 cents).

With the government proposal making little progress, the ruling party has launched separate discussions. The goal is to pass legislation as early as September, or at least by the end of the year.

Financial firms gear up for won stablecoins

Companies, for their part, have already begun technology trials and other preparations for market entry. Some in the industry, however, say the legislative process could spill over into next year.

Kakao Group’s payment service Kakao Pay said on Wednesday that it had completed a proof of concept (PoC) for technology to build a digital asset wallet.

The test examined whether blockchain-based digital assets, including stablecoins, could be used for actual transfers, payments and settlements. Internet-only financial service KakaoBank, under the same group, is now working to connect the PoC technology to its banking system.

Kakao Group is seeking to use the technology to gain an early foothold in the market for won-denominated stablecoins.

Kakao, however, is not alone in the race.

Back in May, KB Financial Group successfully tested the entire process of using won-denominated stablecoins for payments, settlements and overseas remittances in a real-world environment.

In particular, an overseas remittance took only about three minutes — from converting a won-denominated stablecoin into a dollar-denominated stablecoin to depositing the funds into a Vietnamese bank account. The same process takes one to two days through the conventional international remittance system using the Society for Worldwide Interbank Financial Telecommunication, or Swift.

Eliminating the complex network of intermediaries also cuts remittance fees by about 87 percent compared to the conventional system, according to KB Financial Group.

Until last year, companies largely focused on trademark applications and technology development related to won-denominated stablecoins. More recently, their efforts have expanded into payments, settlements, overseas remittances and digital asset custody.

Little progress and a lot to solve

The government and ruling party have made little progress on the second phase of digital asset legislation, known as the Digital Asset Basic Act, amid disagreements over issues including who should be allowed to issue won-denominated stablecoins.

The first phase of legislation in 2023 centered on user protection through the Act on the Protection of Virtual Asset Users. The Digital Asset Basic Act would establish rules governing the issuance and distribution of digital assets and regulate digital asset service providers.

The Financial Services Commission (FSC) initially sought to submit the government’s Digital Asset Basic Act legislation in the first quarter of this year, but progress has remained slow into the second half of the year amid several disagreements.

Two major issues remain: a proposed structure requiring banks or banking consortiums to hold at least 50 percent plus one share in entities issuing won-denominated stablecoins, and a proposed 20 percent cap on the stakes controlling shareholders can hold in digital asset exchanges.

“There are a few final matters that still need to be settled, and discussions are underway, so we should be able to send the bill to the National Assembly soon,” an FSC official said. “Our goal is to submit it within September.”

The ruling Democratic Party (DP) says it cannot wait indefinitely for the government proposal and intends to hold a public hearing on the Digital Asset Basic Act to accelerate the legislation.

The government and ruling party view won-denominated stablecoins as necessary to safeguard monetary sovereignty. Without a won-based payment instrument, dollar-denominated stablecoins could gain dominance in trade and blockchain-based commerce, potentially weakening the role of Korea’s fiat currency.

“There are already bills proposed by numerous lawmakers, but we are dragging our feet while waiting for the government proposal, while the United States and Japan are moving ahead,” said Min Byoung-dug, the senior deputy chair of the DP’s policy committee. “If we waste time coordinating between the government and ruling party, we could fall behind in international competition.”

Other countries already preparing to enter

While the government has yet to finish setting the rules of the game, market players are already prepared to enter the field. Stablecoins denominated in dollars, euros and yen have, in the meantime, begun competing for an early lead in the market.

The United States enacted the Genius Act in July last year, establishing rules covering authorization for issuers, one-to-one reserve backing for the amount of stablecoins issued, users’ redemption rights and priority repayment for users in the event of an issuer’s bankruptcy.

Japan began enforcing subordinate regulations under its Payment Services Act in June this year, which effectively allows the distribution of foreign-issued stablecoins and creates an environment in which they can coexist and compete with yen-denominated stablecoins. Britain also unveiled draft regulations for pound-denominated stablecoins around the same time.

The European Union has already implemented its Markets in Crypto-Assets Regulation to help strengthen the position of euro-denominated stablecoins.

The supply of euro-denominated stablecoins stood at $848.1 million as of Sept. 7, up 22.6 percent from $691.7 million at the beginning of the year, according to blockchain news outlet Cryptopolitan.

“If the basic law attempts to resolve too many issues at once, the legislative process could be delayed,” said Professor Hwang Suk‑jin at Dongguk University's Graduate School of International Affairs and Information Security. “The key principles should be established first, while detailed regulations should be adjusted flexibly in line with changes in the market.”

Banks move ahead despite unresolved government issues

As concerns mount that further delays in legislation could widen Korea’s gap with the global market, banks are already testing ahead, even though government proposals have not yet been finalized.

Companies led by Korea’s four major financial groups — Shinhan, KB Kookmin, Hana and Woori — have begun preparations. Waiting until the government finalizes its proposal before entering the market could leave them trailing global competitors.

A consortium of 21 major global private financial institutions, including Goldman Sachs, recently decided to issue a dollar-denominated stablecoin in the first half of next year, putting them well ahead of Korean companies.

Each of Korea’s four major financial groups is partnering with digital asset exchanges and fintech companies to develop and test relevant technologies.

Most recently, Woori Bank completed a test in which a Coupang Eats food delivery order was paid for with a won-denominated stablecoin, and the payment was settled with the merchant in real time.

Coupang Eats is one of Korea’s biggest food delivery platforms.

Woori Bank also implemented an “on-ramp/off-ramp” function that links digital wallets to bank accounts, enabling conversions between won and stablecoins.

Shinhan Bank is also strengthening its anti-money laundering system in preparation for the introduction of a regulatory framework for stablecoins. Regional banks are conducting their own technology tests covering issuance, distribution and payments.

“Technology development is in its final stages,” said an official at a digital asset exchange working with a financial group to pursue stablecoin issuance. “Some technological changes may be necessary depending on the government proposal, but once a regulatory framework is established, we could launch immediately.”

Korean and overseas banks are also working together on cross-border remittances. Ten Korean banks have begun discussions on a Korea-Europe stablecoin remittance project. With European banks preparing to jointly issue a euro-denominated stablecoin, working-level officials are meeting to develop a remittance model.

The Korea Financial Telecommunications and Clearings Institute is also building a test bed to verify the entire stablecoin process, from issuance, redemption and transfers to reserve asset management and anti-money laundering procedures. The institute began selecting an outside contractor for the project late last month.

However, financial groups and fintech companies have yet to form a single consortium for a won-denominated stablecoin or finalize concrete issuance proposals. At this stage, their efforts are closer to establishing the foundations for potential services that combine exchanges’ distribution and trading infrastructure, platforms’ user bases and payment networks, and financial institutions’ infrastructure.

“Once key rules — including who can issue stablecoins, the requirements for banks’ equity participation and how reserve assets should be managed — are determined through the legislative process, the business models currently under preparation could also change,” a representative of a financial group who requested anonymity said.

BY HWANG JEONG-IL [[email protected]]