As discussions on the introduction of the won stablecoin became serious, the necessity of introducing 'short-term government bonds,' which was reviewed in the early 2010s and then fell by the wayside, has come back to the surface. The direct background is the lack of ultra-short-term risk-free bonds that can be used as reserve assets for stablecoins. However, voices are growing that caution is needed as an increase in the proportion of short-term items in government liabilities could worsen fiscal soundness and constrain the Central Bank's currency policy.
According to the financial sector on the 21st, at a seminar on 'Stablecoins and Short-Term Government Bonds' hosted by the Capital Market Research Institute on the 11th, Senior Researcher Kim Pil-kyu noted, "To enhance the payment stability and value storage function of the (won stablecoin), short-term risk-free bonds are essential," emphasizing the need for the introduction of short-term government bonds that can serve as reserve assets for stablecoins.
◇ The U.S. and EU include short-term government bonds as stablecoin reserve assets
According to Researcher Kim, major countries recognize highly liquid and low-risk assets like short-term government bonds as reserve assets in regulations related to stablecoins. The U.S. 'Genius Act' defines money market funds that invest in short-term government bonds and government-issued treasury bonds with maturities of around 3 months as reserve assets, and the European Union's 'MiCA' is representative.
On the other hand, Korea currently lacks a short-term government bond system, making it difficult to sufficiently support reserve assets. Currently, the Central Bank's currency stabilization bonds, the Ministry of Economy and Finance's financial bonds, and the short-term treasury bonds are effectively serving as substitutes for short-term government bonds; however, there have been continuous criticisms regarding their limitations in supply scale and liquidity.
For instance, currency stabilization bonds are primarily issued for 2-year terms, making it difficult for them to function as short-term benchmark bonds. As of the end of 2020, looking at the balance of currency stabilization bonds of 159.3 trillion won by maturity, 124.2 trillion won of the 2-year bonds accounts for about 78%, while the proportions of 1-year bonds (22.6 trillion won) and short-term bonds of less than 1 year (12.5 trillion won) are merely 22%.
As a result, voices have grown calling for the introduction of short-term government bonds from foreign investors, including institutional investors such as the National Pension Service, who require short-term investments. In 2011, the Capital Market Research Institute conducted a related study under a service contract with the Ministry of Economy and Finance. However, the introduction was stalled due to the reason that the demand for short-term items was not sufficient to justify the introduction of short-term government bonds.
However, with discussions on the introduction of stablecoins, the necessity for short-term government bonds is once again being raised. If the won stablecoin is introduced, there could be a significant demand for reserve assets. According to the Bank for International Settlements (BIS), as of the end of last year, the amount of U.S. short-term government bonds purchased by issuers of dollar stablecoins such as Circle and Tether was about $400 billion. In won, that amounts to approximately 556 trillion won, which is 82% of Korea's government budget for this year (677.4 trillion won).
Senior Researcher Kim Pil-kyu emphasized, "I believe there is sufficient market demand," calling for the introduction of short-term government bonds. Specifically, he suggested diversifying maturities by pilot issuing 1-year bonds first, then adding 6-month and 3-month bonds.
◇ Concerns about fiscal deterioration as short-term bonds increase... Central Bank open market operations become complex
However, the government maintains a cautious stance. The biggest issue is managing fiscal soundness. If the issuance of short-term government bonds becomes regularized, the government's liability maturity structure will shorten, increasing refinancing burdens, which could escalate fiscal operational risks due to increased volatility in short-term interest rates. From the government's perspective, a long-term issuance strategy is stable, and an increased share of short-term items could weaken fiscal control.
The Central Bank's perspective is also complex. If short-term government bonds are introduced and establish themselves as the main short-term products in the market, changes to the open market operation system centered on currency stabilization bonds will be inevitable. In particular, if market funds are restructured to focus on short-term items, the Central Bank will face a burden of having to conduct open market operations more frequently to stabilize short-term interest rates. This adds new variables to the Central Bank's currency policy execution.
On the 19th, the Central Bank submitted a written response to the Strategy and Finance Committee member Cha Kyu-geun of the Rebuilding Korea Party, stating that "If the scale of stablecoin issuance fluctuates, leading to an imbalance in the supply and demand for government bonds, the volatility of short-term interest rates will increase, undermining the overall stability of the short-term financial market," adding that it acts as a disturbing factor in the transmission path of currency policy by causing short-term interest rates to rise and long-term interest rates to fall.
Meanwhile, in academic circles, there are claims that the demand for the won stablecoin may not be as large as expected, making it difficult for short-term government bonds to establish themselves. This is due to the formation of a 'dollar dominance' structure in the global stablecoin market, making the actual demand for the won stablecoin virtually close to 'zero.'
99.75% of the stablecoin market is composed of dollar-based coins. The remaining 0.25% is euro-based. The already issued won stablecoins like BKRW (Binance) and TerraKRW (Terraform Labs) are practically not traded due to weak demand.
Professor Choi Jae-won of the Department of Economics at Seoul National University indicated at a symposium on stablecoins held on the 13th at the university's Wuseok Economic Hall that "It is safe to say that there is almost no demand for the won stablecoin," and noted that "honestly, the justification and benefits for institutionalization are weaker compared to the U.S."