The Bank of Korea has officially paused the second phase of its central bank digital currency (CBDC) tests. Initiated in April, these tests were meant to evaluate the use of a digital won in real-world payments. However, recent government support for stablecoins appears to have shifted the momentum.

High Costs and No Clear Plan Push Banks Away

Sources from the seven participating banks say the CBDC project was already “on the verge of collapse.” The main reason? High costs and lack of a clear commercialization roadmap. Though over 100,000 users joined the initial trial, banks argue there’s little incentive to continue without policy clarity.

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Meanwhile, the government, under newly elected President Lee Jae-myung, is actively promoting stablecoins. A new bill tabled this month allows companies to issue Korean won-pegged stablecoins with a minimum capital of 500 million won (about $370,000). That legislation is quickly reshaping the country’s crypto landscape.

Won-Pegged Stablecoin Initiative Gains Traction

Eight major South Korean banks are now forming an alliance to launch a won-backed stablecoin by 2025. This group includes several CBDC trial participants: KB Kookmin, Shinhan, Woori, and NongHyup.

The move signals a significant shift in strategy. Banks appear more interested in building independent crypto products that offer tangible revenue streams rather than supporting costly central bank projects.

Following the announcement, local fintech stocks reacted swiftly. KakaoPay fell 7%, Hecto Financial dropped 5%, while KB Financial Group and Shinhan saw slight gains of 0.8% and 1.6%, respectively.

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The post South Korea Halts CBDC Trials as Banks Chase Stablecoin Boom appeared first on Coin Engineer.

New President Acts Fast On Stablecoin Promise

Following his recent election win, President Lee Jae-myung has wasted no time delivering on campaign pledges around crypto. His ruling Democratic Party has introduced the “Digital Asset Basic Act,” aiming to permit the issuance of domestic stablecoins and foster a transparent, competitive crypto landscape.

Under the proposal, local companies will be allowed to issue stablecoins if they have a minimum equity capital of 500 million won ($368,000). Issuers must also maintain reserves to back the coins and receive approval from the Financial Services Commission, South Korea’s top financial regulator.

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The legislation seeks to legitimize stablecoin markets and drive broader adoption by ensuring regulatory clarity and investor protection.

Crypto Gains Mass Appeal Across South Korea

Interest in Bitcoin and stablecoins has soared in South Korea. In Q1 of 2024 alone, transactions involving major U.S. dollar stablecoins totaled 57 trillion won ($42 billion) across the country’s five leading exchanges, according to Bank of Korea data.

An estimated one-third of the South Korean population—around 18 million people—is now involved in the crypto market. Building on this momentum, President Lee is also pushing for Bitcoin ETF approvals and the inclusion of Bitcoin in the national pension fund’s investment strategy.

However, these ambitions face resistance from the Bank of Korea, which argues that private stablecoins could undermine the effectiveness of monetary policy.

Crypto Law Boosts Stocks, But Not Without Skepticism

Anticipation around the bill has already impacted financial markets. Shares in digital wallet provider KakaoPay surged up to 45% in five days following the announcement. Still, JPMorgan analysts caution that the rally may be premature, with real benefits from the legislation yet to materialize.

Despite the uncertainty, South Korea’s proactive legislative push sets a bold precedent in Asia’s ongoing crypto regulatory race.

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On Wednesday, the corporation revealed the employment of Jai Yung Byun, a former central bank official from the Bank of Korea who held several leadership positions. At the central bank, he has guided foreign exchange research and global policy planning. Additionally, a chief representative at the Washington, D.C., Bank of Korea Representative Office was Byun.

Byun began consulting SBI Digital Markets, an SBI Digital Asset Holdings affiliate, in 2023. Byun was the country manager for South Korea for Northern Trust before joining SBI. “His knowledge has been crucial in negotiating the complex terrain of the Korean market and building relationships with financial institutions across both the public and private sectors,” the business stated.

“His great knowledge of the Korean market and broad experience will be priceless as we keep increasing our presence and offers in the area,” said SBI Digital Markets CEO Winston Quek. “Using Mr. Byun’s consulting, we will also enhance our standards of governance and regulatory compliance to protect the interests of our institutional investors and partners.”

SBI Holdings, a Japanese financial behemoth founded in 1999, has more than 50 million worldwide clients. Working with Chiliz, SBI Digital Asset Holdings formed a joint venture in May in Japan. In November 2023, the team also teamed with Circle to increase USDC stablecoin acceptance in Japan.

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As expected, the South Korean central bank did not change the policy rate (KROCRT=ECI), which remained at 3.50%, a level not seen in 15 years. The bank also referred to the higher instability of inflation expectations and export strength, which is why it is seen that they are not going to cut interest rates soon.

Referring to the economic dynamics, the economy is expected to grow at its potential growth rate or higher, though financial conditions are easing, due to which there is no hurry to tighten monetary policies, a member of the board commented.

At the end of the year, the analysts forecast that the benchmark rate would be at 3.00% because of the 25 basis point cuts that Bank of Korea is expected to make in the third and fourth quarters.

The consumer price index (CPI) rose by 3.1% year-on-year in March, following a three-month decrease, which was in line with February and well above the bank’s target of 2%.

When a weak economy is also an issue, the Bank of Korea fears that increasing oil prices and more exports will revive inflation.

Another member added, “The stabilization of expected inflation should be given priority over everything else, and I think it would be necessary to continue contractionary policy measures until we are comfortable that the expected inflation has been stabilized enough to accommodate a certain level of supply shock.”.

The identities of board members are not mentioned in the minutes unless they disagree with the bank’s policies and decisions.

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