Stablecoins Shaking Central Bank Foundations: BOK Governor's Warning

Central Banks Under Threat from Stablecoins

The Bank of Korea's Governor, Rhee Chang-yong, recently drew attention to the transformative effects of digital finance on central banks globally. His remarks came during the "Digital Money: Navigating a Changing Financial Landscape" conference last Friday.

The Rising Power of Stablecoins

Rhee underscored the growing clout of stablecoins, specifically USDT and USDC, in disrupting traditional banking operations. According to Yonhap News Agency, Rhee voiced concerns about the misleading stability of stablecoins and their potential impact on financial stability. He warned that their widespread use could undermine central bank currencies and weaken monetary policy effectiveness.

Global Networks and National Risks

Rhee highlighted the risk that global networks, like Visa and Mastercard, pose to countries such as South Korea. These risks encompass challenges in managing capital flows and safeguarding monetary policy independence.

CBDCs: A Potential Response

Rhee stressed the need for central banks to explore central bank digital currencies (CBDCs), both in retail and wholesale forms.

South Korea's CBDC Pilot Projects

The Bank of Korea has initiated a pilot project for a retail CBDC system based on distributed ledger technology (DLT). Rhee acknowledged the unclear advantages of retail CBDCs over existing payment methods but emphasized their programmable potential. He compared this to assembling 'money legos' for complex, conditional transactions via smart contracts. Rhee also mentioned a second project involving wholesale CBDCs, focusing on their integration with tokenized bank deposits and e-money issuance.

Unresolved Challenges and the Future

Despite these advancements, Rhee admitted to unresolved issues like the participation of non-depository institutions and the necessity for appropriate regulations.

While the digital financial landscape evolves, the stability and independence of traditional banking and monetary policy face significant challenges from the emerging realm of stablecoins.