Bank of Korea Urges Urgent CBDC Development to Counter Stablecoin Threat

By: Eva Baxter

The governor of the Bank of Korea, Chang-yong Rhee, warns about the growing threat of stablecoins to traditional central bank money and the effectiveness of monetary policies. He stated that central banks must hasten their efforts to issue both retail and wholesale central bank digital currencies (CBDCs) in order to address this imminent threat.

Stablecoins, despite their name, often lack inherent stability and may undermine the role of central bank-issued money and traditional monetary policies. With the involvement of global networks such as Visa or Mastercard, countries like South Korea may face difficulties in managing capital flows and maintaining monetary policy independence.

Rhee emphasized the need for central banks to consider introducing CBDCs and highlighted South Korea's ongoing efforts in this area. The country has embarked on a pilot project for a retail CBDC that uses distributed ledger technology (DLT) for complex, conditional transactions via smart contracts. South Korea is also in collaboration with financial regulators and the Bank for International Settlements on another pilot project focused on integrating a wholesale CBDC with tokenized bank deposits. This project explores the issuance of tokenized e-money by banks and non-bank financial institutions, fully backed by wholesale CBDCs.

The Bank of Korea's viewpoint aligns with other major global central banks and financial institutions, including the U.S. Federal Reserve, which has emphasized the volatility risks associated with stablecoins, particularly those collateralized by other cryptocurrencies.