South Koreaʼs proposed stablecoin rules emphasise bankruptcy protection

South Korea’s ruling Democratic party proposed its legislation on stablecoins, the Digital Asset Basic Act, to the National Assembly on June 10. The bill, which addresses the stablecoin market and all other digital assets, sets out “bankruptcy remoteness” rules for stablecoin reserves. These require the reserves that back stablecoins to be kept separate and protected in the case of bankruptcy.

South Koreaʼs draft bill noted that stablecoin issuers must maintain “strong reserve management” to guarantee redemption, and be subject to oversight by the countryʼs regulator, the Financial Services Commission (FSC).

The bill provides for a minimum equity capital of Won500 million ($368,000) for stablecoin issuers, down from a previously proposed Won6 billion.

The new threshold is lower than the UK Financial Conduct Authority (FCA)’s permanent minimum requirement of £350,000 ($445,000) proposed in its May consultation paper. The Digital Asset Basic Act echoes global jurisdictions’ efforts to refine crypto approach in the second quarter of 2025.

Troubled history

The move to regulate comes despite South Korea’s troubled history with stablecoins — notably the 2022 Terra-Luna collapse. Terra-Lunaʼs algorithmic stablecoin model collapsed on May 11, 2022, causing a loss of market confidence and a mass sell-off, which wiped out an estimated $60 billion from the digital currency market.

Do Kwon, former chief executive officer of Terraform Labs, faces a maximum sentence of 130-year imprisonment in the US for his role in the Terra-Luna crash, according to a statement by the US Department of Justice (DOJ) in January. Late last year he was extradited from Montenegro to the US, where he will be tried on fraud charges.

Consumer protection regime

South Koreaʼs proposed stablecoin regime adds to its previous plans for digital assets regulation. Prior to the national election on June 3, the FSC issued several plans for digital assets consumer protection, including rules for examination and investigation of unfair trading activities in the market.

The Virtual Asset User Protection Act (VAUPA), came into force on July 19, 2024, with a goal to foster “market discipline”. It is South Korea’s first sector-specific law, focusing solely on digital assets businesses and mandating the segregation of consumer assets, cold wallet storage and insurance.

VAUPA also imposed harsh penalties for misconduct in digital assets markets. Bad actors face from one year to life imprisonment for unfair trading; as well as fines of three to five times the value of the illegal gains; confiscation of all unlawful profits; and additional administrative penalties for regulatory breaches.

One more crypto president

Furthermore, newly elected president Lee Jae-myung pledged to “legalise and promote” the cryptocurrency sector during his campaign, and expressed a commitment to enabling assets such as Bitcoin to be listed on the stock market as part of his policy platform.

“We need to establish a won-backed stablecoin market to prevent national wealth from leaking overseas,” said Lee, during a policy discussion in May.

According to Business Korea, the Bank of Korea (BoK) is pushing back against these digital asset plans, with BoK governor Rhee Chang-yong warning that non-bank stablecoins could undermine monetary policy.

The South Korean media quoted an unnamed official warning that if won-based stablecoins act like legal tender, they could disrupt monetary policy, so they should require BoK involvement in their authorisation.

Another key provision of the Digital Asset Basic Act is that it transfers regulatory authority and oversight from the central bank to the FSC.