Chang-yong Rhee warned that stablecoins would harm central banks and advocated for CBDCs to maintain monetary control.
South Korea’s central bank governor, Chang-yong Rhee, has warned that the rise of stablecoins could pose a major threat to the traditional role of central bank currencies and affect the effectiveness of monetary policy, local media has reported.
Rhee made the statement at a digital currency conference in Seoul on Dec. 15. He added that central banks must step up efforts to issue central bank digital currencies in both retail and wholesale forms to mitigate this looming threat.
Financial stability concerns
In his keynote speech, Rhee highlighted two main issues that central banks must confront.
The first major concern is the rise of stablecoins and the existential threat they pose to central bank currencies, while the second major concern is the lack of an appropriate regulatory framework for non-depository or non-financial institutions participating in the digital financial system.
Rhee stressed that despite their nomenclature, stablecoins often lack inherent stability and could undermine the role of central banks in issuing money. This, in turn, could undermine the effectiveness of traditional monetary policy.
Further complicating matters is the potential involvement of global networks such as Visa or Mastercard, especially for a country like South Korea. This could complicate managing capital flows and maintaining monetary policy independence, Rhee added.
To address these challenges, Governor Rhee suggested that central banks consider introducing central bank digital currencies (CBDCs) in both retail and wholesale forms.
He highlighted South Korea’s efforts in this area, including a pilot project for a retail CBDC system that leverages distributed ledger technology (DLT). The programmability of such currencies, which allows for complex conditional transactions through smart contracts, was particularly cited as a significant advantage.
Additionally, the Bank of Korea, in partnership with financial regulators and the Bank for International Settlements, is launching a second CBDC pilot project to explore wholesale CBDC.
The project focuses on integrating wholesale CBDC with tokenized bank deposits. It aims to explore the issuance of tokenized electronic money by banks and non-bank financial institutions fully backed by wholesale CBDC.
Generate emotional resonance
The Bank of Korea’s views are in line with those of other major central banks and financial institutions around the world. For example, the Federal Reserve has highlighted the volatility risks associated with stablecoins, especially those collateralized by other cryptocurrencies.
The Federal Reserve’s analysis points out that these digital assets could trigger market runs and exacerbate financial instability. Similarly, the Bank for International Settlements has expressed concerns about the use of stablecoins in cross-border payments.
According to a report by the Bank for International Settlements’ Committee on Payments and Market Infrastructures, stablecoins could challenge monetary sovereignty and financial stability and affect seigniorage revenues. The report also suggests that the benefits of stablecoins can only be realized under a strict design and regulatory framework. #韩国 #CBDC