A global battle over digital currencies driven by stablecoins has begun. The United States is seeking to extend dollar dominance into the digital space, while countries are stepping up competition in stablecoins to protect their own currencies. South Korea has also begun institutionalising stablecoins and has moved to defend its digital currency sovereignty. Marking its 19th anniversary, DigitalToday reviews the rapidly approaching era of digital currencies and how the finance and fintech industries are preparing for it. [Editor’s note]

[DigitalToday reporter Ji-young Lee] The global monetary order is being rapidly reshaped around digital technology. A full digital currency era has not yet arrived, but a new monetary system centred on central bank digital currencies (CBDCs) and stablecoins is becoming a reality. As countries enter competition not just over technological innovation but over monetary sovereignty, digital currencies are emerging as a key variable in global financial dominance.

Stablecoins, in particular, are quickly expanding their influence in global payments and transfers on the back of price stability, fast remittances and low fees. Stablecoins that once stayed within the crypto asset market are now seen as a practical digital payment method, and are beginning to directly affect countries’ currency strategies.

The United States is already showing signs it wants to use stablecoins not simply as a digital asset but as a strategic tool to maintain dollar dominance. Through the GENIUS Act last year, it put in place a federal-level stablecoin regulatory framework and sped up moves to bring them into the regulated system. The legislation allows a range of issuers, including bank subsidiaries, to issue stablecoins, while requiring 1-to-1 reserve assets.

In the market, interpretations are emerging that the United States has made clear its intention to maintain a dollar-centred order in the global digital payments market through dollar-backed stablecoins. In fact, dollar-based assets account for an overwhelming share of the global stablecoin market. As the use of dollar stablecoins rises rapidly in overseas remittances, digital asset trading and global payments, there are also assessments that they are effectively playing the role of a digital dollar. For the United States, the spread of dollar-based stablecoins could lead to greater demand for dollars and increased demand for U.S. Treasuries.

Europe and Japan are taking a somewhat different approach from the United States. The European Union has introduced MiCA, a digital asset regulatory framework, and is accelerating efforts to build a euro-based digital finance ecosystem. For electronic money tokens (EMTs), it restricted issuance to banks or electronic money institutions and required that part of reserves be deposited with banks. The aim is to secure financial stability even as stablecoins grow.

Japan also amended its Payment Services Act in 2023 to become the first among major economies to legalise banks’ issuance of stablecoins. Assessments say it adopted a relatively conservative regulatory framework, limiting issuers to regulated financial institutions such as banks and requiring full protection of user assets. China is also expanding pilot projects for its CBDC, the digital yuan (e-CNY), as it moves to strengthen its influence in the digital payments market. This underpins analysis that the competition over monetary sovereignty is expanding into the digital space.

Moves by global financial companies are also accelerating. JPMorgan Chase operates Kinexys, a stablecoin platform for corporate payments, and is expanding commercialisation in the business-to-business payments market. Citigroup is also working to automate letters of credit issuance and payments through Citi Token Services, a blockchain-based trade finance platform. Global banks are treating stablecoins not as a simple investment asset but as next-generation payment infrastructure.

◆ South Korea’s fight to defend digital currency sovereignty... CBDC and stablecoins accelerate

In South Korea, discussion has surfaced since last year as the need for a won-based stablecoin has been highlighted in politics and the financial industry. That is because if global dollar stablecoins rapidly penetrate domestic payments and remittance markets, the foundation for using the won could weaken over the long term. Calls are also growing for building a domestic digital payments ecosystem to maintain the won’s competitiveness in a digital economy.

The government and political circles are stepping up discussion of a Digital Asset Basic Act that would include a stablecoin regulatory framework and user protection measures. Key issues being cited include allowing issuance of won-pegged stablecoins and establishing a digital asset supervision system.

The Bank of Korea, however, appears to place more weight on building an order based on a CBDC than on the spread of private-sector-led stablecoins. The central bank is now pushing ahead with the second phase of Project Hangang, a pilot project for a CBDC and deposit tokens. Under Project Hangang, the Bank of Korea issues a wholesale CBDC, and commercial banks issue and distribute deposit tokens based on it. In the ongoing second phase, transaction tests closer to commercial use are set to take place, including biometric authentication, person-to-person transfers and treasury fund execution.

Bank of Korea Governor Hyun Song Shin (신현송) also said in a recent inaugural address that he would "increase the use of CBDCs and deposit tokens through the second phase of Project Hangang and raise the won’s standing in the digital payments environment". In the market, there are interpretations that the Bank of Korea will keep stablecoins as an auxiliary tool but intends to keep leadership of digital currency with the central bank and the banking sector.

The financial sector is also moving quickly. Major financial holding companies and banks are setting up stablecoin response task forces and reviewing issuance and usage plans. Some financial firms are expanding cooperation with overseas digital asset companies as they move to craft strategies to take the lead in the payments and remittance market. The fintech and crypto asset industries are also paying attention to the potential for the digital payments market to expand. Competition for market leadership has begun even before the system is fully in place.

There are still many challenges. The Bank of Korea is concerned that indiscriminate issuance of stablecoins centred on non-banks could reduce the effectiveness of monetary policy. There are also many issues to resolve in designing the system, including reserve asset regulation, user protection and managing issuers. In the market, cautious views also coexist on whether a won stablecoin can become a practical tool to defend monetary sovereignty.

Even so, what is clear is that competition in digital currencies has already begun. Going forward, what may matter more than who holds the stronger currency is who pre-empts digital payment networks and currency ecosystems. The contest for leadership in the digital currency era is emerging as a new variable shaking the global financial order.