Korean Not Keen on Including Bitcoin as Forex Reserve

Officials of the South Korean central bank – Bank of Korea – on Sunday called for a ‘cautious approach’ to an idea of including bitcoin as foreign exchange reserves given its price volatility.

This announcement comes amidst global discussions on the role of digital currencies in national financial strategies, sparked by the US President Donald Trump’s executive order on March 6, which directed the strategic stockpiling of Bitcoin as part of his election pledges.

Responding to a question by Rep. Cha Gyu-geun of the minor Rebuilding Korea Party, the Bank of Korea (BOK) said it has neither discussed nor reviewed the possible inclusion of bitcoin in foreign exchange reserves and a cautious approach was needed to the matter.

This is the first time the Bank of Korea has made its stance public expressing its position on Bitcoin stockpiling.

The central bank cited high price volatility and non-compliance with foreign exchange reserve criteria as primary reasons for its decision. Bitcoin’s fluctuating prices, which have ranged from $110 in January to $76 recently, underscore the volatility that worries financial institutions.
Bitcoin’s price volatility is very high, the Bank of Korea said and highlighted the concerns that transaction costs could increase sharply during the liquidation process if virtual assets become unstable.

The Bank of Korea emphasised that foreign exchange reserves must be immediately usable when needed, possessing liquidity and marketability, criteria that Bitcoin does not meet.

Furthermore, the bank noted that foreign exchange reserves should be denominated in currencies with convertibility and generally have a credit rating of investment grade or higher, standards that Bitcoin fails to satisfy.

Many Central Banks Not Keen

The Bank of Korea’s cautious approach aligns with the views of major central banks worldwide, including the European Central Bank, Swiss National Bank, and the Japanese government, which have expressed skepticism about incorporating Bitcoin into their reserves.

This sentiment is echoed by Prof Yang Jun-seok of Catholic University of Korea, who said: “it is appropriate for foreign exchange to be held in proportion to the currencies of countries with which we trade.”

Unless major countries issue bonds in Bitcoin, the advantage of holding virtual assets is diminished, Prof Yang said.

According to a report in BusinessKorea, amidst these discussions, there are suggestions that the Bank of Korea should consider stablecoins, a type of virtual asset designed to maintain a stable value, unlike typical cryptocurrencies.

Stablecoins are seen as a potential bridge between traditional finance and digital currencies, with the possibility of being more acceptable as reserve assets due to their stability.

President Trump has requested Congress to pass legislation related to stablecoins earlier this month, indicating a strategic interest in leveraging these assets to maintain dollar hegemony.

Prof Kang Tae-soo from KAIST Graduate School of Finance, said that since the US was likely to leverage stablecoins rather than Bitcoin to maintain dollar hegemony, whether the IMF will recognise stablecoins as foreign exchange reserves in the future is important.

“This perspective highlights the broader geopolitical and economic strategies related to currency dominance and the evolving role of digital currencies in global finance,” Prof Kang added.