🚨 Stablecoins

Today Korean Social News for Beginners | 2025.12.26

0️⃣ Digital Dollar Alternative, Foreign Exchange Market Impact and Regulatory Challenges

📌 Choosing Digital Dollars Over Real Dollars... Stablecoin Trading Reaches 500 Billion Won Per Day

💬 As the Korean won continues to weaken, trading of dollar-based stablecoins among domestic investors is rapidly increasing. This year, trading volume for dollar-based stablecoins like Tether and Circle on major Korean cryptocurrency exchanges reached about 181 trillion won, a more than 90% increase from a year ago. Daily average trading volume is about 500 billion won, exceeding 1% of commercial bank foreign exchange spot trading volume. The surge is attributed to expectations of exchange rate gains and growing perception that stablecoins can be used like digital dollars. However, concerns are also raised that such fund movements could increase dollar demand and stimulate won depreciation. Discussion about stablecoins' impact on the real foreign exchange market and regulatory needs is expected to intensify.

💡 Summary

• Stablecoins are cryptocurrencies designed to maintain value linked to fiat currencies like the US dollar.
• Amid won weakness, domestic stablecoin trading has surged to an average of 500 billion won per day.
• Concerns are raised about potential foreign exchange market burden from increased dollar demand, requiring regulatory discussion.

1️⃣ Definition

Stablecoins are cryptocurrencies designed to maintain value linked to fiat currencies like the US dollar or euro, or to specific assets. Unlike highly volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins are structured to maintain 1 coin = 1 dollar, making them useful for payments and asset storage.

Major dollar-based stablecoins include Tether (USDT) and Circle (USDC). Issuers typically maintain cash or government bonds equal to the amount issued to preserve value stability. Recently, they are being recognized as digital dollar alternatives and their use is expanding for investment and remittance. In cryptocurrency exchanges, they function like a base currency, serving as a medium for buying and selling other cryptocurrencies.

💡 Why Is This Important?

• During exchange rate volatility, they serve as value storage means and become asset protection tools for investors.
• They function as base currency in the cryptocurrency market, increasing transaction convenience.
• Increased dollar demand can affect foreign exchange markets and monetary policy.
• They are growing rapidly in a regulatory vacuum, making institutionalization discussion urgent.

2️⃣ Current Status and Issues of Stablecoins

📕 Background of Surging Domestic Trading

• Won weakness has increased stablecoin demand. Main causes include:

  • The won/dollar exchange rate has risen since late 2024, decreasing the won's value.
  • Investors worried about won asset value decline sought dollar-denominated assets.
  • Funds moved to stablecoins, which are easier to access than physical currency exchange or dollar deposits.
  • Perception spread that stablecoins can be used like digital dollars along with exchange rate gain expectations.

• Trading volume has increased explosively. Key statistics include:

  • This year's stablecoin trading volume at major domestic exchanges reached about 181 trillion won.
  • This is over 90% increase from a year ago, with daily average of about 500 billion won.
  • It exceeds 1% of commercial bank foreign exchange spot trading volume.
  • While overall cryptocurrency trading stagnated, only stablecoins surged, showing clearly different investment purposes.

📕 How Stablecoins Work and Their Features

• They maintain price stability through fiat currency linkage. Main features include:

  • Issuers typically hold cash or government bonds equal to the amount issued as reserve assets.
  • Designed to maintain 1 coin = 1 dollar value, preventing sharp price changes.
  • When users want to exchange stablecoins for cash, they withdraw from reserve assets.
  • Transparency and actual holding of reserve assets are key trust factors.

• They function as base currency in cryptocurrency markets. Main uses include:

  • Investors buy and sell other cryptocurrencies with stablecoins instead of won or dollars.
  • They reduce exchange costs and time, making fund transfers between exchanges easier.
  • They serve as temporary safe haven when cryptocurrency prices plunge.
  • During high exchange rate volatility, they are used as value storage and short-term fund transfer means.

📕 Impact on Foreign Exchange Markets and Monetary Policy

• Increased dollar demand can burden foreign exchange markets. Main concerns include:

  • When domestic investors buy stablecoins, exchanges must secure dollar assets overseas.
  • This process indirectly expands dollar demand, potentially stimulating won depreciation.
  • Effects similar to dollar outflow in the real foreign exchange market may occur.
  • Concerns are raised about potential impact on foreign exchange soundness and monetary policy effectiveness.

• Potential conflicts with existing financial systems exist. Main issues include:

  • Stablecoins function similarly to bank deposits but exist outside regulation.
  • Large-scale withdrawal events could threaten financial stability.
  • Concerns about potential abuse for money laundering or illegal fund movements.
  • They may circumvent central bank monetary policy transmission channels.

💡 Major Stablecoin Issues

1. Foreign Exchange Burden: Potential to stimulate won depreciation through increased dollar demand
2. Regulatory Vacuum: Function like bank deposits but operate outside regulation
3. Reserve Asset Transparency: Difficult to verify issuers' actual asset holdings
4. Financial Stability: System risk possible during large-scale withdrawal events
5. Illegal Use: Concerns about abuse for money laundering or illegal fund movements

3️⃣ Regulatory Measures and Future Tasks

✅ Ensuring Transparency and Stability

• Reserve asset management must be transparently disclosed. Key directions include:

  • Issuers must regularly disclose holdings of cash, government bonds, and other reserve assets.
  • External audits should verify that actual holdings match issued amounts.
  • Strong sanctions are needed when reserve assets are insufficient or false.
  • Systems should be built for investors to easily access reserve asset information.

• Issuance requirements and operating standards must be clearly defined by law. Key tasks include:

  • Qualification requirements and capital standards for stablecoin issuers must be established.
  • Legal regulations must define reserve asset holding ratios and asset composition standards.
  • Insurance or guarantee systems must be established for user protection.
  • Liquidity management plans must be prepared for large-scale withdrawal events.

✅ Foreign Exchange Management and Monetary Policy Integration

• Foreign exchange transaction monitoring systems must be established. Key directions include:

  • Real-time monitoring of stablecoin trading's impact on foreign exchange markets is needed.
  • Reporting systems to authorities for large-scale buying/selling could be introduced.
  • Measures like trading restrictions should be considered when foreign exchange soundness is threatened.
  • Central banks and financial authorities must cooperate to monitor monetary policy effects.

• Relationships with Central Bank Digital Currency (CBDC) must be established. Key tasks include:

  • Clear distinction between roles of Bank of Korea's CBDC and stablecoins is needed.
  • Pre-discussion needed on how to manage stablecoins when CBDC is introduced.
  • Systems must be designed for coexistence of private stablecoins and public CBDC.
  • Role division in international payments and remittances should be considered.

✅ International Cooperation and System Harmonization

• Systems must be updated in line with global regulatory trends. Key measures include:

  • The US and Europe are already pursuing stablecoin regulatory legislation.
  • Korea must also establish regulatory frameworks meeting international standards.
  • International cooperation needed for cross-border stablecoin transactions.
  • Must prevent regulatory arbitrage exploiting differences between countries' regulations.

• Balance between user protection and innovation promotion must be achieved. Key directions include:

  • Excessive regulation should not hinder technological innovation.
  • However, user protection and financial stability must be ensured.
  • Regulatory sandboxes can test new technologies and improve systems.
  • Realistic and effective regulations must be created through dialogue with industry.

4️⃣ Related Terms Explained

🔎 Tether (USDT) and Circle (USDC)

• Tether and Circle are the most widely used dollar stablecoins.
  • Tether (USDT), launched in 2014, is the first major stablecoin with the largest market cap in the global stablecoin market. 1 USDT is designed to maintain equal value to 1 dollar and is most commonly used on cryptocurrency exchanges.
  • Circle (USDC), jointly launched by Circle and Coinbase in 2018, is rated as more transparent than Tether. It increases credibility by publishing monthly reserve asset details and undergoing external audits. It has high preference among institutional investors.
  • While both stablecoins claim to hold dollars or government bonds equal to issued amounts, controversy over actual reserve asset transparency and sufficiency continues. Tether was criticized for not properly disclosing reserve asset information and paid a settlement to the New York Attorney General. These trust issues increase regulatory needs.

🔎 Central Bank Digital Currency (CBDC)

• CBDC is digital legal tender issued by central banks.
  • Central Bank Digital Currency means digital legal tender directly issued and managed by central banks. It has the same legal status as cash and is guaranteed by the central bank. Unlike privately issued stablecoins, it is backed by national credit.
  • The Bank of Korea is also conducting CBDC research and pilot projects. First, it aims to diversify payment methods responding to digital economy expansion. Second, it increases financial inclusion so everyone can use safe digital currency. Third, it can enhance monetary policy effectiveness and innovate the financial system.
  • Establishing relationships between CBDC and stablecoins is an important task. CBDC is a public good guaranteed by the state, while stablecoins are private assets issued by companies. Whether to create a system where both coexist, or regulate stablecoins when introducing CBDC, depends on each country's policy choice. Experts emphasize establishing stablecoin regulatory frameworks before introducing CBDC.

🔎 Reserve Assets

• Reserve assets are real assets backing stablecoin value.
  • Reserve assets mean real assets like cash, government bonds, and corporate bonds that stablecoin issuers hold equal to issued amounts. Theoretically, holding 1 dollar worth of assets per coin ensures users can exchange stablecoins for cash anytime.
  • Reserve asset composition and management vary by issuer. First, holding 100% cash is safest but has low profitability. Second, including government bonds or short-term bonds generates profit but may reduce liquidity. Third, including corporate bonds or other assets increases risk. Fourth, if reserve assets are insufficient or invested in risky assets, stablecoin value may crash.
  • Transparency is the biggest issue. It's difficult to externally verify whether reserve assets claimed by issuers actually exist and are properly managed. Tether was suspected for not properly disclosing reserve asset information, and some stablecoins collapsed due to insufficient reserves. Therefore, regulators are considering mandating reserve asset disclosure and external audits.

🔎 Foreign Exchange Soundness

• Foreign exchange soundness means a country's foreign exchange holdings and management are in stable condition.
  • Foreign exchange soundness means a country's ability to properly manage foreign currency inflows and outflows, maintain sufficient foreign exchange reserves, and respond to sharp exchange rate fluctuations or financial crises. Foreign exchange market stability and currency value maintenance are core objectives.
  • Factors threatening foreign exchange soundness include: first, when short-term foreign debt surges causing sudden foreign currency outflows. Second, when foreign exchange reserves are insufficient weakening exchange rate defense capability. Third, when large-scale capital outflows cause sharp exchange rate increases. Fourth, when current account deficits persist making foreign currency demand exceed supply.
  • Surging stablecoin trading is a new challenge to foreign exchange soundness. When domestic investors buy stablecoins, exchanges must secure dollars overseas, indirectly increasing dollar demand. This can have effects similar to dollar outflow in the real foreign exchange market. Especially when stablecoin demand surges during won weakness, it can add upward pressure on exchange rates, requiring close monitoring by foreign exchange authorities.

5️⃣ Frequently Asked Questions (FAQ)

Q: Are stablecoins as safe as bank deposits?

A: It depends on issuer credibility, and they don't receive the same protection as bank deposits.

• Stablecoins are theoretically safe if issuers hold sufficient reserve assets. However, they don't receive deposit insurance protection like bank deposits, so users may suffer losses if issuers go bankrupt or reserve assets are insufficient. Also, reserve asset transparency is not ensured, making it difficult to verify actual holdings.
• Therefore, when using stablecoins, you must carefully check issuer credibility. First, choose issuers that regularly disclose reserve assets and undergo external audits. Second, prioritize stablecoins with large market caps and long stable operation histories. Third, it's safer to hold short-term only when needed rather than storing large amounts long-term. Fourth, watch system changes as protection levels may increase with stronger regulations.

Q: Can you profit from exchange rates with stablecoins?

A: Possible during won weakness, but consider transaction costs and risks.

• When won/dollar exchange rate rises, buying stablecoins can generate exchange rate gains as value increases versus the won. For example, buying 1 dollar worth of stablecoins when the rate is 1,300 won and selling when it reaches 1,400 won generates 100 won profit. They can be used as a means to shift to dollar assets when won depreciation is expected.
• However, note that: First, exchange fees and conversion costs occur, reducing actual profits. Second, losses are possible if exchange rates move differently than expected. Third, additional risks exist from stablecoin value fluctuations or issuer credibility issues. Fourth, speculative trading for short-term exchange gains may burden foreign exchange markets and could become subject to future regulation. Better to use as short-term hedging tools rather than long-term investments, keeping investment amounts at appropriate levels.

Q: What happens if stablecoin regulations are strengthened?

A: User protection strengthens, but transaction convenience may decrease.

• When regulations strengthen, mandatory reserve asset disclosure and external audits increase transparency. This protects users and improves stablecoin credibility. Also, strengthened qualification requirements and capital standards will remove poorly managed issuers from the market. Liquidity management plans for large-scale withdrawal events will improve financial stability.
• However, increased regulatory compliance costs may raise transaction fees or limit some services. Strengthened foreign exchange monitoring may require reporting for large-scale buying/selling, reducing convenience. Issuers or exchanges failing to meet regulations may be removed from the domestic market, reducing choices. But long-term, healthy market order will be established, creating an environment where investors can use services with greater confidence. Balancing regulation and innovation is an important task.

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