Stablecoins To Challenge Central Banks: Bank of Korea Governor Sounds Alarm On USDT, USDC

Bank of Korea (BOK) Gov. Rhee Chang-yong highlighted the rapid evolution of the digital financial landscape and its implications for central banks worldwide at a conference, "Digital Money: Navigating a Changing Financial Landscape," last Friday.

What Happened: Rhee emphasized the growing influence of stablecoins such as USDT USDT/USD and USDC USDC/USD on traditional banking operations.

"The proliferation of stablecoins, such as USDT and USDC, poses new challenges to central banking operations. Despite their name, stablecoins often lack stability, raising concerns about financial stability. Their widespread adoption could diminish the role of central bank money and impair the effectiveness of monetary policies," Yonhap News Agency quoted Rhee as saying.

Rhee pointed out the potential risks associated with the involvement of global networks such as Visa Inc V or Mastercard Inc MA, especially for countries like South Korea.

These risks include challenges in managing capital flows and maintaining the independence of monetary policies.

Rhee underscored the importance of central banks considering the introduction of central bank digital currencies (CBDCs), both retail and wholesale.

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Why It Matters: Rhee introduced South Korea's pilot project for a retail CBDC system that utilizes distributed ledger technology (DLT).

While acknowledging the unclear advantages of a retail CBDC over existing fast payment methods, Rhee highlighted the potential benefits of its programmability.

"This feature unlocks a realm of possibilities, such as executing complex, conditional transactions automatically through smart contracts, akin to assembling 'money legos.'

"However, it's worth noting that such programmability is also possible with wholesale CBDCs," he said.

The BOK governor also mentioned a second CBDC pilot project in collaboration with financial regulators and the Bank for International Settlements.

This project focuses on a wholesale CBDC and its integration with tokenized bank deposits. It also explores the issuance of tokenized e-money by banks and non-bank financial institutions, fully backed by wholesale CBDCs.

Rhee did acknowledge the existence of unresolved issues, such as the participation of non-depository or non-financial institutions and the need for appropriate regulations.

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