What does the Bank of Korea(BOK) think of stablecoins?

Annyeonghaseyo, fellow investors! Today, I want to share some fascinating insights from a recent Bank of Korea report titled "Trends in Stablecoins and Potential Risks Related to Financial Stability." As a Korean investor, I believe it's crucial to understand global financial trends, especially those that could impact our markets. Stablecoins, often seen as the bridge between traditional finance and the burgeoning world of digital assets, are certainly one such area.

The Rise of Stablecoins: A Global Phenomenon

Stablecoins, as the name suggests, are cryptocurrencies designed to minimize price volatility by being pegged to a stable asset, typically fiat currency like the US dollar. They offer the benefits of stability, accessibility, and transactional efficiency, contributing significantly to digital financial innovation. The report highlights that stablecoins have steadily grown as a primary transaction tool in the virtual asset market, alongside the expansion of the overall virtual asset market.

Excluding periods like the Terra-Luna incident, stablecoins have shown continuous growth. Tether (USDT) and USDC dominate the market capitalization, accounting for 66.3% ($153.1 billion) and 26.4% ($61.0 billion) respectively of the global stablecoin market as of May 2025. This dominance is primarily due to their high value stability and convenience, establishing them as key transaction mediums within the virtual asset market, often replacing other virtual assets and even fiat currencies.

Figure 1: Global Stablecoin Market Trends (Source: Bank of Korea Report)

The report indicates a dramatic increase in stablecoin usage for virtual asset transactions, rising from a mere 7.9% in December 2017 to a staggering 84.0% in May 2025. While domestic stablecoin transaction volumes in Korea have also significantly increased (from an average daily of 0.28 trillion KRW in 2024 to 0.73 trillion KRW in Q1 2025), our share remains marginal at 0.3% of the global volume as of April 2025. This is largely attributed to Korea's real-name deposit and withdrawal account system for virtual asset transactions, which has fostered a won-based transaction structure.

Expanding Horizons: Beyond Virtual Assets

Stablecoins are no longer confined to the virtual asset ecosystem. Their utility is expanding into various sectors. Some investors are holding dollar-pegged stablecoins to secure dollar assets, especially in emerging economies with unstable local currencies and high inflation, where these stablecoins act as a store of value, replacing traditional currencies. Furthermore, there are increasing attempts by card companies and fintech firms to integrate stablecoins into existing payment systems for everyday transactions.

Major countries are actively working on institutionalizing stablecoins to accommodate their continuous expansion. The EU and Japan have taken a lead in this regard, while the United States is also pursuing related legislation, reflecting a policy stance that encourages stablecoin adoption. This global push for regulation suggests a future where stablecoins play an even more significant role in the broader financial landscape.

The Mechanics of Stablecoins: A Bridge to Traditional Finance

Unlike other virtual assets, stablecoins are characterized by their value stability. Fiat-backed stablecoins are typically designed to hold highly liquid, safe assets denominated in fiat currency (such as government bonds) as reserves, corresponding to their issuance volume. The value of a stablecoin is maintained by investors' trust that they can redeem it for the same face value by liquidating the reserve assets upon request. This 1:1 pegging mechanism creates a crucial link between the virtual asset ecosystem and the traditional financial system. Stablecoin issuers operate by receiving investor deposits and managing them as reserve assets (e.g., government bonds, MMFs, and deposits) to generate profit, thus creating an interdependent relationship between the two systems.

Figure 2: Stablecoin Reserve Asset Operating Mechanism (Source: Bank of Korea Report)

As of Q1 2025, major stablecoins like Tether and USDC hold $172.8 billion (81.5%) of their reserves in US Treasury bonds, with MMFs and cash/deposits accounting for $6.3 billion (3.0%) and $5.2 billion (2.5%) respectively. The report anticipates that if stablecoins become more institutionalized and widespread in major countries like the US, the scale of stablecoin reserves will significantly increase. Citi (2025) even projects that stablecoin issuers' holdings of US Treasury bonds could grow to $1.2 trillion by the end of 2030, about 5-6 times the current level.

Potential Risks: What We Need to Watch Out For

While the potential of stablecoins is undeniable, their widespread adoption as a general payment method or currency substitute is still uncertain. However, given their potential, their use could significantly expand depending on how related regulations are introduced. The Bank of Korea report highlights several key risks associated with stablecoin proliferation:

1. Coin Run Risk

If trust in a stablecoin's value stability or its reserve assets is compromised, or if technical errors or related crimes occur, it could lead to de-pegging (deviation from its pegged value) and large-scale redemption requests, triggering a "coin run." For fiat-backed stablecoins, a decline in the value of reserve assets or a lack of transparency regarding their composition can erode investor confidence, leading to a coin run. Such events can propagate into the broader financial system through financial institutions holding stablecoins directly or as collateral. These institutions face investment losses due to value depreciation or collateral value risk. Furthermore, financial institutions playing various roles in the stablecoin market (issuers, custodians) could face liquidity, reputational, and operational risks.

A notable example is the de-pegging of USDC after the Silicon Valley Bank (SVB) collapse in 2023, where 8% of its reserves were deposited at SVB, causing its value to drop to $0.88. The report also mentions Silvergate Bank, which voluntarily liquidated after experiencing liquidity and reputational risks due to the 2022 crypto market downturn and the FTX incident, given that a significant portion of its deposits (82% as of end-2021) consisted of funds from virtual asset-related companies.

When stablecoin issuers hold short-term financial products like government bonds and MMFs as reserves, a coin run can lead to selling pressure on these assets, potentially causing sharp price declines in the short-term money market. If stablecoin reserves are primarily composed of bank deposits, a coin run could result in large-scale deposit withdrawals, leading to liquidity risks for banks. The absence of safeguards like deposit insurance or central bank lender-of-last-resort functions for stablecoins means the risk from market trust erosion could be even greater.

2. Payment and Operational Risks

Stablecoins, operating on blockchain, inherently carry various payment and operational risks due to the nascent stage of related regulations and infrastructure. Technical flaws, such as smart contract errors or platform outages, could lead to payment failures. Concerns also exist regarding fraud and theft, which could be exacerbated by the complexity and pseudonymity of stablecoins. While these risks might be confined to the virtual asset ecosystem if stablecoins are only used within it, their widespread adoption as a general payment method could lead to systemic risks impacting the entire financial system and economic activity in the event of external shocks or IT failures.

Recent media reports (February 2025) indicate an increase in cash extortion and fraud cases using in-person Tether transactions, often suspected to be for illicit money laundering.

3. Foreign Exchange and Capital Flow Risks (for Non-Reserve Currency Countries)

In non-reserve currency countries, widespread use of foreign currency-based stablecoins can increase foreign exchange-related risks, such as exchange rate volatility and expanded capital outflows, thereby destabilizing the financial system. Countries with unstable currencies may increasingly prefer foreign currency-based stablecoins, leading to a depreciation of their local currency and increased exchange rate volatility. Furthermore, if domestic currency is converted into foreign currency-based stablecoins for overseas investment or purchases, funds may flow out of the country without passing through financial institutions like banks. This process could be exploited for evading government foreign exchange regulations or taxes, and for money laundering.

The IMF FSB (2023) emphasizes that countries with unstable currencies and fragile monetary systems should be particularly cautious about the risk of dollar-based stablecoins replacing their domestic currencies.

4. Monetary Policy Effectiveness Constraint Risk

The widespread use of stablecoins could undermine the credibility of currency and weaken banks' credit creation functions, thereby limiting the effectiveness of monetary policy. If stablecoins rapidly proliferate and act as a substitute for money, the money supply could expand outside the central bank's control, diminishing currency credibility and restricting monetary policy effectiveness. Stablecoin issuers, aiming to maximize profits by operating with reserve assets from investor funds, also pose the risk of over-issuing stablecoins.

Moreover, if stablecoin reserves consist of bank deposits, the composition of bank deposits could shift as household small deposits convert into large deposits held by stablecoin issuers. This change in deposit composition could increase banks' funding costs, thereby impairing their credit creation function.

Key Takeaways and Implications for Investors

Considering the various advantages of stablecoins, their institutionalization is being pursued globally. However, we must not overlook the potential risks to financial stability and the broader economy that could arise from the strengthened linkage between the virtual asset ecosystem and the traditional financial system as stablecoins expand. To minimize these potential risks, careful consideration is needed regarding value stability, reliability of reserve assets and related infrastructure, and issuer requirements. Major countries are focusing on these aspects to establish regulations aimed at preventing stablecoin-related risks. They are also implementing various measures, such as compliance with anti-money laundering (AML) protocols, given the recent increase in money laundering and cybercrimes utilizing stablecoins.

The Bank of Korea, along with the government and financial authorities, recognizes the significant potential impact of stablecoin expansion on the financial system and the economy. Therefore, they are conducting comprehensive and thorough reviews regarding stablecoin adoption. The Bank of Korea plans to maintain close monitoring of domestic and international stablecoin markets and regulatory trends. Concurrently, it will continue to strengthen cooperation with the government and financial authorities to ensure regulations are established in a way that minimizes potential macroeconomic prudential and monetary policy risks, without hindering various innovations based on stablecoins.

For us, as investors, this means staying informed. While stablecoins offer exciting opportunities, understanding the regulatory landscape and potential risks, as highlighted by our own Bank of Korea, is paramount. This report serves as a valuable guide for navigating the evolving digital finance space.

Disclaimer:

This blog post is based on information from a Bank of Korea report and is intended for informational and educational purposes only. It does not constitute financial advice, investment recommendations, or an endorsement of any specific stablecoin or investment strategy. The financial markets, including virtual assets, are highly volatile and involve significant risks, including the potential loss of principal. Readers should conduct their own thorough research and consult with a qualified financial advisor before making any investment decisions. The author and publisher are not responsible for any losses incurred as a result of relying on the information presented herein.

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