The South Korean government has outlined plans to impose foreign exchange regulations on cross-border stablecoin transactions, to tackle the growing use of this digital currency in international trade, local media reported on October 8.
The move comes in response to the increasing role of stablecoins, especially those pegged to the US dollar, in trading activities outside traditional regulatory frameworks.
Regulating stablecoins
The Ministry of Economy and Finance has announced its intention to stabilize the growing number of cross-border crypto transactions involving stablecoins.
Authorities are aiming to limit the risks that could arise from their growing function as a payment instrument outside the virtual asset ecosystem, where they have mainly been used as a medium of exchange.
The Financial Services Commission (FSC) has announced that the regulation of stablecoins would be a focus during the second phase of the Virtual Asset User Protection Act. This phase will take into account regulations from other regions, such as the European Union (EU) and Japan, which have already implemented stablecoin laws.
Stablecoins have gained significant influence in global financial markets. Tether, the largest stablecoin issuer, owns a significant amount of US government bonds backing its USDT stablecoin, with reserves approaching those of South Korea itself.
Critics have noted that the government’s delay in addressing the growing use of stablecoins in trading has left regulatory gaps. Concerns have been raised about the potential threats that unregulated capital flows could pose to monetary sovereignty and the broader financial system.
Other approaches
In contrast to South Korea’s gradual approach, both the EU and Japan have quickly implemented regulatory frameworks. The EU Regulation on Markets in Crypto Assets (MiCA) allows financial institutions to issue stablecoins, while Japan treats stablecoins as a recognized form of payment, subjecting large transactions to currency reporting rules.
Officials in South Korea are also considering developing a legal framework for the issuance of stablecoins pegged to the Korean won. This would lay the necessary foundation for regulating stablecoins pegged to both domestic and foreign currencies.
Additionally, the government is expected to ease restrictions on companies holding crypto accounts, a regulation that has been criticized by industry leaders. By allowing companies to participate in stablecoin-based trading, the government could record these transactions in official statistics, providing a more accurate picture of the economy.
Other countries, including the US, UK and Australia, are also working on legislation to regulate stablecoins. South Korea plans to refer to these international precedents to develop its own robust regulatory system for stablecoin transactions.