South Korea’s Bold Step in Regulating Digital Assets Hits a Roadblock

In South Korea, ambitious legislative efforts to regulate digital assets have encountered a significant delay. The Digital Asset Basic Act, which seeks to establish groundwork for cryptocurrency oversight, particularly around stablecoins, has faced setbacks due to disagreements among major stakeholders. This legislation was expected to be enacted by the end of this year but is now postponed to 2026.

The Stablecoin Dilemma

South Korea’s Financial Services Commission (FSC) designed the draft regulation to impose requirements on stablecoin issuers similar to the traditional financial sector. Issuers would be compelled to support their coins with reserves held in low-risk assets such as bank deposits or government bonds, safeguarding investors against potential issuer bankruptcy.

Beyond stablecoins, the new rules also place heavy obligations on cryptocurrency service providers, aligning them with the rigid consumer protection norms evident in South Korea’s online retail markets. These measures include demanding service contracts, comprehensive information disclosure, and strict advertising practices, with liability for system failures or cyber breaches falling on the service providers.

Who Should Issue Stablecoins?

The delay in progressing the legislation stems from contrasting opinions on who should be allowed to issue stablecoins. The Bank of Korea recommends that issuance should be limited to entities where banks hold a majority, seeing this as a safeguard against financial instability.

On the other hand, the FSC is wary of such restrictions, suggesting they would hinder technological innovation by excluding tech firms. The suggestion of establishing a new advisory body for licensing has further divided opinion. The BOK supports this addition, but the FSC argues it remains unnecessary due to existing structures involving the central bank and economic policymakers.

In response to the stalemate, the ruling Democratic Party has taken steps to collate various legislative suggestions from lawmakers, seeking a unified approach. This is against a backdrop of growing local stablecoin projects. President Lee Jae Myung emphasizes the importance of a national stablecoin to sustain monetary sovereignty in a global market dominated by the US dollar.

Previous legislation addressing market manipulation and insider trading, adopted in July 2023, marked the beginning of South Korea’s regulatory journey in the crypto space. However, the continuation of this effort through the Digital Asset Basic Act remains uncertain without a resolution to the current conflicts.

“The risk management and transparency embodied in the act are crucial for advancing our digital asset ecosystem,” said a spokesperson from the Financial Services Commission.