Growing dollar-backed stablecoin trades may destabilize Korean economy

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 and strict regulations, possibly 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 CAPITAL FLOW VOLATILITY

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 South Korean won-based assets 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 volatility 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 trade as settlements through those cryptocurrencies are simpler and less expensive.

In one example, for a recent transaction, a local trading company received $1 million in Tether, the largest cryptocurrency by trading volume with 70% market share among stablecoins, instead of a fiat currency.

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. Previously, when done through the bank, such a transaction had taken more than one day.

“Corporate (cryptocurrency) accounts are not allowed in Korea. But businesspeople and small companies should trade with personal accounts in terms of costs and procedures,” said a stablecoin expert.

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 risk.”

STRICT REGULATIONS

South Korea’s strict currency market regulations have led local companies to seek stablecoins, industry sources said.

The Foreign Exchange Transactions Act requires individuals or companies to report offsets in payments to the finance ministry, for example.

If a South Korean company buys $100,000 worth of goods 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.

Write to Mi-Hyun Jo and Hyeong-Gyo Seo at mwise@hankyung.com
 
Jongwoo Cheon edited this article.