Bank of Korea Takes Cautious Stance on Bitcoin Reserve Amid Growing Debate

The Bank of Korea (BOK) has announced it is taking a "cautious approach" toward the idea of including Bitcoin as part of the country’s foreign exchange reserves, despite increasing calls from lawmakers and crypto advocates for South Korea to consider such a move.

In a March 16 response to a written inquiry, the Bank of Korea clarified that it has not discussed or reviewed the potential inclusion of Bitcoin in its reserves. The central bank cited the cryptocurrency's high volatility and other risks as key reasons for its decision to hold off on further consideration.

High Volatility and Transaction Costs

In response to a question from Representative Cha Gyu-geun of the National Assembly’s Planning and Finance Committee, BOK officials explained that they had not engaged in any discussions or evaluations about Bitcoin’s role in the nation’s foreign exchange reserves. The central bank stressed that Bitcoin’s price volatility makes it a risky asset for such a strategic role. 

"Bitcoin’s price volatility is very high," the bank stated. "In the case of cryptocurrency market instability, transaction costs to cash out Bitcoins could rise drastically." 

Bitcoin's price has indeed seen considerable fluctuations in recent weeks, swinging between $98,000 and $76,000 before settling at approximately $83,000 — a 15% drop from February 16, according to CoinGecko data. These fluctuations highlight the risks associated with holding Bitcoin as a reserve asset.

Global Pressure and Calls for Change

The Bank of Korea’s cautious stance comes amid growing global discussions surrounding the role of cryptocurrencies in national financial strategies. Notably, US President Joe Biden’s recent executive order established a framework for a strategic Bitcoin reserve and digital asset stockpile. This move has sparked renewed interest in the possibility of integrating cryptocurrencies like Bitcoin into national reserves around the world.

In South Korea, some members of the ruling Democratic Party and crypto industry lobbyists have also called for the government to explore the inclusion of Bitcoin in its foreign exchange reserves. At a seminar held on March 6, these advocates argued that South Korea should not only consider Bitcoin but also develop a won-backed stablecoin as part of the country’s broader digital asset strategy.

Bank of Korea’s Criteria for Foreign Exchange Reserves

Despite the growing pressure, the Bank of Korea remains firm in its position, emphasizing that foreign exchange reserves must meet specific criteria. These reserves must be liquid and immediately usable in times of need, as well as be rated investment grade or higher. Bitcoin, in the bank’s view, does not meet these requirements, given its high volatility and lack of liquidity in times of market instability.

Expert Opinions on Bitcoin and Foreign Exchange Reserves

Several experts also weighed in on the issue, reinforcing the central bank’s position. Professor Yang Jun-seok of Catholic University of Korea argued that foreign exchange reserves should align with the currencies of the countries with which South Korea conducts trade. 

Professor Kang Tae-soo from the KAIST Graduate School of Finance pointed to the likelihood that the United States may use stablecoins, rather than Bitcoin, to maintain dollar hegemony in the future. He also noted that the International Monetary Fund (IMF) might play a critical role in determining whether stablecoins could be recognized as legitimate foreign exchange reserves in the coming years.

South Korea’s Evolving Crypto Regulatory Landscape

In addition to the Bitcoin reserve debate, South Korea’s financial regulators have been closely watching developments in the global cryptocurrency space. Earlier this month, the country’s financial watchdog examined trends in crypto regulation in Japan, particularly the Japanese Financial Services Agency's approach to digital assets. South Korea has also been contemplating the possibility of lifting its ban on cryptocurrency exchange-traded funds (ETFs), a move that would bring the country in line with other global financial markets.

As the global conversation around cryptocurrencies continues to evolve, South Korea is positioning itself as a key player in the future of digital assets. However, the Bank of Korea’s decision to take a cautious approach to Bitcoin reserves underscores the complexities and risks associated with incorporating such volatile assets into national financial strategies.