Growing dollar-backed stablecoin trades may destabilize Korean economy
Mi-Hyun Jo and Hyeong-Gyo Seo
8 HOURS AGO
(Courtesy of Getty Images) Trading in dollar-backed stablecoins, cryptocurrencies pegged to the US currency, in South Korea hit a record high amid complex and costly currency exchange processes, as well as strict regulations, posing potential risks of making fund flows more volatile and eventually destabilizing Asia’s fourth-largest economy.
The combined trading volume of such digital assets such as Tether, USD Coin and Dai listed on South Korean cryptocurrency exchanges was estimated at $32.1 billion in the first nine months, according to The Korea Economic Daily’s analysis on Monday. Their daily trading volume averaged an all-time high of $117.3 million.
The trading value was likely much higher as more local companies use dollar-backed stablecoins, which are difficult for the government to track, in their international trades due to convenience and low costs, experts said.
“International trades in stablecoins are not reflected in official statistics, which could create a loophole in the government’s policies,” said Hwang Suk Jin, professor at Dongguk University Graduate School of International Affairs & Information Security in Seoul. “The government needs to consider measures to deal with the issue.”
MORE VOLATILE CAPITAL FLOWS
The growing use of stablecoins is expected to accelerate capital in and out of the country as cryptocurrency trading does not need to go through the banking system, industry sources said.
In an economic crisis, investors are likely to rush out of the country by converting their assets in the South Korean won into such digital assets, the sources said.
Bank of Korea Governor Rhee Chang-yong also expressed concerns over stablecoins late last year.
“They are expected to increase volatilities in capital flows between countries and affect a nation’s monetary sovereignty,” he said.
SIMPLER AND LESS EXPENSIVE
Many domestic companies prefer dollar-backed stablecoins instead of the greenback in international trades as settlements through those cryptocurrencies are simpler and less expensive.
A local trading company received $1 million in Tether, the largest cryptocurrency by trading volume with a 70% market share among stablecoins, instead of an actual currency for its recent transaction.
The company included a cryptocurrency wallet address rather than a bank account in the contract to settle the transaction. It did not provide banks with any documentation such as an invoice for the transaction to prove the money was for an international trade deal. The company received the money in real time, which used to take more than one day through banks.
“Corporate (cryptocurrency) accounts are not allowed in Korea. But it is better for businessmen and small companies to trade with personal accounts in terms of costs and procedures,” said a stablecoin expert.
The existing international trades need currency conversions, which carry fees for foreign exchange and services of the Society for Worldwide Interbank Telecommunications (SWIFT).
It also takes two to five days to complete money transfers through banks.
“Money transfer costs through stablecoins are very low as they allow direct settlements through blockchain networks,” said an industry source. “Direct transactions between exporters and importers reduce FX rate risks.”
Hana Bank’s trading floor in Seoul (File photo by Yonhap) STRICT REGULATIONS
South Korea’s strict regulations on the currency market caused local companies to seek stablecoins, industry sources said.
The Foreign Exchange Transactions Act requires individuals or companies to report an offset in a payment to the finance ministry, for example.
If a South Korean company buys goods for $100,000 from another firm, which owes the buyer $70,000, it needs to pay only $30,000 to the seller. The ministry requires the buyer to report all details of the transaction.
“Small trading companies, which lack personnel handling complex administrative procedures in trades in the dollar, may prefer stablecoins,” said another industry source.