South Korea Drives Forward with Ambitious Crypto Regulations

South Korea’s Stablecoin Framework

The draft regulation, developed by South Korea’s Financial Services Commission (FSC), targets stablecoin issuers, imposing obligations reminiscent of traditional finance. Issuers must hold reserve assets in low-risk instruments such as bank deposits or government bonds. These reserves, corresponding to 100% of the stablecoins in circulation, are to be entrusted to authorized custodians like banks. This structure seeks to prevent risk from directly impacting investors in the event of an issuer’s bankruptcy.

The regulation, however, extends beyond stablecoins, imposing comprehensive duties on cryptocurrency service providers as well. Information disclosure, service contracts, and advertising standards are being elevated to traditional finance levels. In cases of cyber attacks or system failures, providers are expected to bear liability without fault. This approach aligns with South Korea’s stringent consumer protection regime in the online retail sector.

Issuers’ Debate Stalls Progress

A significant obstacle has been disagreement over which institutions might issue stablecoins. The Bank of Korea (BOK) advocates for restricting issuance to consortia with at least 51% bank ownership, viewing this model as safer for monetary stability and systemic risks.

Conversely, the FSC argues that strict ownership limits would marginalize tech companies and stifle innovation. The introduction of a new advisory board for licensing has also met resistance. While the BOK supports forming a special committee, the FSC insists the current structure already incorporates the central bank and economic policymakers.

With proceedings stalled, the ruling Democratic Party began exploring an alternative by consolidating various draft proposals from lawmakers. These discussions occur amidst a local surge in stablecoin initiatives. Since taking office earlier this year, President Lee Jae Myung has prioritized developing a won-linked stablecoin market to maintain monetary sovereignty against the predominantly US dollar-dominated global market.

The Digital Asset Basic Act, following the initial regulation package against market manipulation and insider trading adopted in July 2023, symbolizes a critical step in South Korea’s legislative progression. However, without institutional consensus, advancing to this second phase remains a challenge.