Bank of Korea warns stablecoin proposal could shake bond market

Representations of cryptocurrencies Reuters-Yonhap

SEOUL, August 19 (AJP) - South Korea’s central bank on Tuesday rejected a proposal to issue short-term treasury bonds to back a won-based stablecoin, cautioning that such a move could disrupt financial markets and distort government financing.

In a written response to the National Assembly’s Strategy and Finance Committee, the Bank of Korea said treasury bonds should be issued strictly for their intended purpose — financing government operations — not to satisfy demand from specific sectors such as cryptocurrency.

Stablecoins, digital tokens typically pegged to national currencies, require reserve assets that are both highly liquid and low-risk. The Korea Capital Market Institute, a government-backed think tank, recently suggested that short-term treasury bonds could meet that need for a Korean stablecoin.

The central bank pushed back firmly.

“Considering the issuance of short-term bonds to satisfy specific market demand like stablecoins is inappropriate,” it wrote. The bank argued that greater issuance of short-term bonds would increase refinancing risks and strain the market’s capacity to absorb additional supply, ultimately threatening fiscal stability.

This is the latest in a series of warnings by the bank over the government’s push to accelerate stablecoin adoption, which it has repeatedly said could jeopardize monetary and financial stability if rushed.

The think tank's senior research fellow, Kim Pil-kyu, cited U.S. and European regulatory frameworks that allow stablecoins to hold short-term government debt as reserve assets.

The Bank of Korea countered that fluctuations in stablecoin issuance could create destabilizing imbalances in the treasury market, triggering swings in short-term interest rates and rippling into other funding markets, including commercial paper and certificates of deposit.

Instead, the bank recommended its own monetary stabilization securities — particularly 91-day bonds issued on a regular basis — as a more suitable reserve asset. U.S. legislation, it noted, also restricts stablecoin reserves to securities with maturities of fewer than 93 days.

Kim Dong-young davekim0807@ajupress.com