South Korea's crypto regulation makes a major turnaround! Stablecoin legislation stalls, tech industry banks vie for dominance

South Korea’s cryptocurrency industry faces a turning point. According to Yonhap News Agency, the originally scheduled Digital Asset Basic Law has been postponed to 2026 due to key regulatory disagreements. This stablecoin bill, promoted by President Lee Jae-myung, was once seen as a milestone for Korea’s crypto market, but now faces deadlock over “stablecoin issuer qualifications” and “reserve asset custody mechanisms.” The tug-of-war over regulatory authority between the Financial Services Commission and tech industry players has put the legalization process of stablecoins in Korea on hold.

Lee Jae-myung’s Crypto Vision and Political Betting

Before taking office in June, South Korean President Lee Jae-myung promised to promote the issuance of stablecoins pegged to the Korean won as a core policy to revitalize the country’s cryptocurrency market. This commitment is not isolated but part of Lee’s overall crypto-friendly policy. He also advocates for national pension funds to invest in digital assets and supports the issuance of Bitcoin-linked exchange-traded funds (ETFs).

There are clear strategic considerations behind these policies. Korea has one of the world’s most active cryptocurrency trading markets, with a high crypto holding rate globally, but has long been constrained by strict regulations and the lack of domestic stablecoins. Lee aims to legalize Korean won stablecoins to keep the massive trading demand within the country and open new avenues for Korea’s tech industry.

However, this political gamble is now facing technical setbacks. The bill proposed by the ruling Democratic Party in June explicitly allows the issuance of stablecoins pegged to the Korean won, but specific implementation details have triggered conflicts of interest. The bill requires stablecoin issuers to entrust all reserve assets to authorized custodial institutions like banks, a seemingly reasonable regulation that has become a trigger for legislative delays.

Regulatory Power Struggle: The Tug-of-War Between Banking System and Tech Innovation

The core contradiction delaying Korea’s stablecoin bill lies in who is qualified to issue and regulate stablecoins. Within the Financial Services Commission, two opposing factions exist, and this disagreement has directly hindered the bill’s progress.

Three Major Controversies

Issuer Qualification Threshold: Traditional finance advocates argue only licensed banks and large financial institutions should issue stablecoins, while tech innovators believe the field should be open to blockchain technology companies.

Reserve Asset Custody Rights: Banks demand all reserves be held by custodial banks and charge fees, whereas tech firms question this could create new monopolies and increase issuance costs.

Timing of Regulatory Authorization: Should a regulatory body be authorized before approving the bill to oversee stablecoin issuers, or should legislation be enacted first with a gradual development of the regulatory framework?

Reports indicate that the Financial Services Commission is reviewing the proposal but is also considering limiting the role of financial institutions in Korea’s stablecoin sector to encourage participation by tech companies. This conflicting stance reflects deep internal divisions within the Korean government: on one hand, ensuring financial stability through strict regulation; on the other, not wanting to miss out on blockchain technological innovation.

Concerns from traditional financial institutions are not unfounded. The collapse of the Terraform Labs ecosystem and the de-pegging of UST stablecoin caused significant impact in Korea, with tens of thousands of Korean investors suffering losses. The co-founder of this incident, Do Kwon, was recently sentenced to 15 years in prison in the US and may be extradited back to Korea facing up to 40 years in prison. This disaster has made Korean regulators extremely cautious about stablecoin risks.

Tech industry players argue that over-reliance on traditional banking systems will stifle innovation. They point out that major global stablecoins like USDT and USDC are issued not by banks but by specialized blockchain fintech companies. If Korea restricts issuance rights to banks, it could hinder innovation and ultimately reduce competitiveness internationally.

Delayed Legislation’s Far-reaching Impact on Korea’s Crypto Market

The postponement of the Digital Asset Basic Law until 2026 means Korea’s stablecoin legalization will have to wait at least two more years. This period is enough for significant changes in the market landscape. Currently, Korean crypto traders mainly rely on USD-pegged stablecoins like USDT and USDC, which flow out of the country and fail to generate value for the domestic economy.

More seriously, regulatory uncertainty may drive Korean crypto companies abroad. Singapore, Dubai, and Hong Kong are actively vying to become the regional hub for crypto, offering clear regulatory frameworks and tax incentives. Continued delays in legislation could cause Korea to fall behind in this regional competition.

From an investor’s perspective, the delay signals confusion. The gap between Lee Jae-myung’s campaign promises and actual legislative progress undermines confidence in the government’s crypto-friendly policies. This uncertainty suppresses institutional investment and dampens retail enthusiasm for domestic crypto projects.

However, delays may also have positive effects. The two-year buffer allows regulators to observe global stablecoin regulation practices, especially the EU’s MiCA regulations and US stablecoin legislation progress. Korea can learn from international experience to craft a more comprehensive regulatory framework and avoid regulatory gaps caused by rushed legislation.

The Shadow of Terraform Labs and Cautious Regulation

The Do Kwon case cannot be ignored in Korea’s stablecoin legislation. The Korean-born entrepreneur’s project collapse caused losses estimated at over $40 billion, with a significant proportion of Korean investors affected. This disaster has made the Korean public extremely cautious about algorithmic stablecoins and decentralized finance projects.

The current bill requires reserves to be entrusted to authorized custodial institutions, aiming to prevent a repeat of the UST disaster. However, this overly conservative approach may be excessive. Fully collateralized stablecoins like USDC and USDT have not experienced similar issues, and overly strict regulation could hinder normal financial innovation.