Recognizing the threat posed by stablecoins in monetary policies, Bank of Korea Governor Rhee Chang-yong believes their CBDC should be given a sense of urgency.
Stablecoins are Not Really Stable
Bank of Korea (BoK) Governor Rhee Chang-yong said stablecoins like Tether (USDT) and USD Coin (USDC), despite their prefix, don’t exactly represent stability. He questioned their capability to maintain their peg with the US dollar during his keynote speech at the Digital Money: Navigating a Changing Financial Landscape conference.
“This underscores the urgency for central banks to consider introducing central bank digital currencies (CBDC), whether retail or wholesale,” Rhee commented. “Their widespread adoption could diminish the role of central bank money and impair the effectiveness of monetary policies.”
Rhee revealed BoK is developing a framework for a wholesale CBDC pilot. They are also studying using digital ledger technology (DLT) in real-world asset tokenization.
Additionally, the Korean central bank is preparing to roll out its retail CBDC. They are targeting 100,000 users for the digital Korean Republic Won (SKW) pilot in 2024.
In July this year, BoK partnered with KEB Hana Bank for its CBDC and tokenization program. Through tokenized deposits settled through central bank currency, the proponents are looking to thwart exchange departures and ensure the programmability of these digital assets. Another reason they had for fast-tracking them was so they would not be left out of the developments in the sector.
S&P Stablecoin Assessment
In a related report, S&P just released its evaluation of mainstream stablecoins. The analytics firm comprehensively reviewed the largest stablecoins by market value based on their asset quality, taking note of their credit risk, market value, and custody issues. It also examined how they are safeguarding their digital assets from such risks through over-collateralization (OC) and liquidation mechanisms.
From the results, they are ranked on a five-point scale with 1 having a “Very Strong” system and 5 being “Weak.” Of the eight stablecoins assessed, only Tether made it to 4, which is still alarming because it fell under the “Constrained” rating. This only helps reinforce Rhee’s concerns.
BIS Paper on Regulated Stablecoins for Cross-Border Payments
Last month, the Bank of International Settlements (BIS) published a paper titled, “Considerations for the use of stablecoin arrangements in cross-border payments.” The study assessed whether or not properly designed and regulated (PDR) stablecoin arrangements (SA) could enhance the efficiency and processing speeds of cross-border transactions.
The study concluded with the challenges outweighing the advantages. A primary problem noted by BIS is PDRSAs are harder for central banks to monitor. Likewise, central banks could find it difficult to enforce their monetary policies towards these instruments.