Just for payments, or for returns too? Debate grows over interest on Korean won stablecoins

[Financial News] As discussions on introducing a Korean won stablecoin move into full swing, a debate over whether it should pay interest is surfacing inside and outside the financial sector. Policymakers and industry players are now weighing whether a stablecoin should be limited to a means of payment, or allowed to offer yield-generating features as well.
According to the financial industry on the 27th, McKinsey & Company recently presented the option of allowing interest payments as one of the scenarios under review at a closed-door briefing on the Korean won stablecoin, hosted by the Korea Federation of Banks (KFB) for its major member banks.
The KFB commissioned McKinsey & Company last November to conduct consulting on the Korean won stablecoin. The latest briefing served as an interim review of the research project, and the final report is expected to be completed next month.
Analysts say McKinsey & Company put interest payments on the table because of structural limitations inherent in stablecoins. If a stablecoin functions only as a simple means of payment, it is difficult to encourage customers to keep funds parked in it, which in turn could heighten the risk of deposit outflows for banks. There is also a view that some level of revenue model is needed to secure platform competitiveness.
Following this proposal, banks also discussed the possibility of paying interest, but sentiment has recently shifted toward not putting interest payments at the forefront. An official at one bank said, "During our internal discussions, we are converging on a direction where interest will not be paid."
Observers believe this change in stance is largely due to the policy authorities’ position. The Financial Services Commission (FSC) and the Bank of Korea (BOK) clearly want to confine stablecoins to a means of payment and settlement. Once interest is attached, a stablecoin could effectively turn into a financial product similar to a deposit or a money market fund (MMF), potentially affecting the overall monetary system and the traditional deposit regime.
However, the controversy over interest is unlikely to die down quickly. Major overseas jurisdictions that are ahead in legislating stablecoins are also still debating whether interest payments should be allowed. In the United States in particular, explicit interest payments are restricted, but market players have adopted structures that are effectively similar to interest, such as offering returns from reserve asset management in the form of rewards or fee rebates. U.S. banks argue that if stablecoins provide interest or other forms of yield, they could compete directly with traditional bank deposits and undermine financial stability, and are calling for tighter regulation.
Given these precedents, some expect that debates over both direct and indirect forms of interest provision on stablecoins could flare up again in Korea as well.
Critics also argue that non-dollar stablecoins cannot gain an edge over dollar-denominated stablecoins through payment convenience alone, and that yield features are needed to make holding them more attractive. For example, China has allowed commercial banks to pay interest on wallet balances of its Central Bank Digital Currency (CBDC), the Digital renminbi (e-CNY). This move is widely seen as a strategic choice to strengthen the currency’s competitiveness against dollar stablecoins.
coddy@fnnews.com Ye Byung-jung Reporter