Bank of Korea Governor Chang-yong Rhee recently expressed concerns about the increasing popularity of stablecoins and the potential threats they pose to the traditional roles of central bank money and the effectiveness of monetary policies. Speaking at a conference on digital money in Seoul on December 15, Rhee emphasized the need for central banks to develop their own digital currencies to compete with stablecoins.

Rhee’s remarks come at a time when stablecoins, such as Tether and USD Coin, have gained significant attention and usage within the cryptocurrency industry. Stablecoins are designed to maintain a stable value by pegging their price to an underlying asset, typically a fiat currency like the US dollar. As a result, stablecoins have become an attractive alternative for users seeking stability and a reliable store of value in the highly volatile crypto market.

However, Rhee raised concerns about the potential risks associated with stablecoins. One of the primary concerns is that stablecoins could undermine the traditional roles of central bank money. Central bank money, typically in the form of physical cash or digital reserves held by financial institutions, plays a crucial role in monetary systems by serving as a medium of exchange, a unit of account, and a store of value. Stablecoins could potentially disrupt this system by offering an alternative form of money that is not issued or controlled by central banks.

Furthermore, Rhee highlighted the potential impact of stablecoins on the effectiveness of monetary policies. Central banks rely on their ability to control the money supply and interest rates to manage inflation and stabilize the economy. However, the growing popularity of stablecoins could limit central banks’ control over the money supply, as users may prefer to hold and transact in stablecoins instead of central bank-issued currency. This could potentially weaken the transmission mechanism of monetary policy and hinder central banks’ ability to influence economic conditions effectively.

To address these concerns, Rhee urged central banks to explore the development of central bank digital currencies (CBDCs). CBDCs are digital representations of fiat currencies, issued and controlled by central banks. By issuing their own digital currencies, central banks can maintain control over the money supply and ensure the stability and integrity of the financial system. Additionally, CBDCs can provide consumers with a digital alternative to traditional forms of money while maintaining the trust and confidence associated with central bank-issued currency.

Rhee’s call for CBDC development is reflective of a global trend among central banks exploring the potential benefits and risks of digital currencies. Central banks, including the People’s Bank of China and the European Central Bank, have been actively researching and experimenting with CBDCs in recent years. The ongoing development of CBDCs aims to leverage the advancements in technology, such as blockchain and distributed ledger technology, to enhance the efficiency, security, and inclusivity of payments and financial systems.

Implementing CBDCs, however, comes with its own set of challenges. Central banks must carefully consider various factors, such as the design of the CBDC, its impact on financial stability, and the potential implications for the broader economy. Additionally, the introduction of CBDCs could have far-reaching consequences for the banking sector, as it may reshape the relationship between central banks, commercial banks, and other financial intermediaries.

In conclusion, Bank of Korea Governor Chang-yong Rhee’s concerns over the rise of stablecoins highlight the potential threats they pose to the traditional roles of central bank money and the effectiveness of monetary policies. Rhee’s call for CBDC development reflects a growing trend among central banks worldwide as they explore the benefits and risks associated with digital currencies. It remains to be seen how central banks will navigate the complex landscape of digital currencies and strike a balance between innovation and maintaining financial stability.