Table of Contents
Researcher
*Asia Stablecoin Alliance is launched by Heechang Kang and Jinsol Bok from Four Pillars, along with Alex Lim (Jongkyu Lim), the Korea lead at LayerZero, to accelerate stablecoin adoption across Asia and to serve as a research and community hub for establishing clear stablecoin strategy and technical infrastructure. (X Link, Substack Link)
Key Takeaways
As discussions around the use cases of KRW stablecoins heat up, many are paying attention to their potential as a means of payment.
Stablecoins are very similar in nature to prepaid funds such as KakaoPay Money and NaverPay Money in terms of issuance eligibility, reserve fund management and revenue distribution, fee structure, and insolvency safeguards. However, in terms of utility, stablecoins can unify fragmented platforms and merchants, and potentially expand into on-chain use.
That said, in the early stages of the stablecoin market, it will be difficult for stablecoins to offer significant advantages over prepaid funds as a payment method. This is due to limited on-chain services supporting KRW stablecoins, Korea's strict foreign exchange regulations, and a complex user experience that will act as initial barriers to adoption.
1. Prepaid Funds vs Stablecoins
1.1 Similarities as a Means of Payment
As discussions around issuing KRW stablecoins intensify in Korea, attention is also growing around their potential use cases. In the past, I have emphasized the importance of utility just as much as issuance for the growth of the stablecoin industry.
Currently, the most active use case for stablecoins is in crypto trading on CEXs and DEXs, but many are eyeing payments as the next major application. Payments represent the most direct connection between stablecoins and real-world usage, and many features of stablecoins could bring benefits to payment systems.
In Korea, when thinking about payments, one cannot overlook the role of digital wallets and simple payments. According to the Bank of Korea, the average daily transaction volume of simple payment services in 2024 was KRW 1.023 trillion, marking over 10 percent growth from 2023. This accounts for 35 percent of all payment methods, showing little difference from credit cards, which account for 41 percent.
Looking at prepaid funds, customers deposit fiat currency and receive a stored balance of equal value for real-world use. At first glance, this appears quite similar to stablecoins. But what exactly is the difference between prepaid funds and stablecoins?
1.2 Prepaid Funds vs Stablecoins
1.2.1 Issuance Eligibility
Prepaid electronic payment instruments can only be issued by registered prepaid issuers. To become a prepaid issuer, an entity must submit documents to the Financial Services Commission and undergo a review process. This includes requirements such as securing IT professionals, maintaining financial soundness, and meeting minimum capital thresholds. Registration becomes mandatory if the business operates at least one commercial service and two or more affiliated merchants. However, the registration obligation is waived if the total outstanding balance is under KRW 3 billion or the annual issuance is under KRW 50 billion. Major prepaid services in Korea include KakaoPay Money, NaverPay Money, Toss Money, Payco Points, and BaeminPay balances.
For KRW stablecoins, under the Digital Asset Basic Act proposed by Min Byung-deok of the Democratic Party, the requirements include a minimum capital of KRW 1 billion, prior approval from the Financial Services Commission, incorporation within Korea, maintaining reserves exceeding 100 percent, insolvency protection structures, and securing professional personnel. Notably, issuance is not limited to banks and financial institutions. Private entities such as fintech firms may also be eligible. Although the bill has not yet passed, fintech companies, banks, securities firms, game developers, and conglomerates have recently shown interest by filing trademarks related to KRW stablecoins.
1.2.2 Reserve Management
Prepaid issuers must manage more than 100 percent of prepaid funds in segregated accounts. This means the funds must be managed separately from the issuer’s own assets. Because prepaid funds must remain fully available to customers, they are managed using the following secure methods to avoid investment losses:
Bank deposits: Funds are held in protected bank accounts under the Depositor Protection Act.
Trusts: Funds are entrusted to banks or trust companies and invested in low-risk assets such as government or municipal bonds.
Payment guarantee insurance: Insurance that ensures customer reimbursement in case the issuer goes bankrupt.
For KRW stablecoins, there are currently no detailed domestic guidelines on reserve asset management. However, under the GENIUS Act in the United States, stablecoins must be backed by highly liquid assets worth more than 100 percent of the issued amount. These may include US dollar cash, short-term government bonds, FDIC-insured deposits, repos and reverse repos, and money market funds.
1.2.3 Revenue from Reserve Management
Prepaid issuers can earn interest income from managing customer reserve funds. For example, in 2024, KakaoPay held approximately KRW 564 billion in prepaid funds, which were entrusted to Shinhan Bank, generating KRW 19 billion in interest. Typically, this interest income is shared between the prepaid issuer and the trust institution. The reason this income cannot be distributed to customers is because, in 2019, when fintech firms began returning part of the reserve as interest or points to compete, Korea’s financial authorities blocked this practice, citing concerns over unauthorized deposit-taking activities.
Source: Circle
Like prepaid issuers, stablecoin issuers can also earn yield by managing their reserves. For instance, out of the approximately $63B backing USDC, $53.7B is managed by BlackRock in short-term treasuries and repos. However, stablecoin issuers are not allowed to distribute the resulting earnings to stablecoin holders. This is to prevent stablecoins from functioning like interest-bearing bank deposits.
That said, Coinbase offers interest to USDC holders, and PayPal does the same for PYUSD holders. This is legally allowed because the interest is provided by platform operators such as Coinbase and PayPal, not by the issuers Circle or Paxos themselves.
1.2.4 Utility
Prepaid funds can be used across various platforms within Korea. For example, NaverPay supports payments for a wide range of Naver services including shopping, content, reservations, and subscriptions. NaverPay Money is also linked to cards that can be used at global Visa merchants, for transportation, and potentially for payments on non-Naver platforms if supported.
Stablecoins offer even greater potential in terms of utility because they are borderless digital currencies that exist on neutral networks like Ethereum. In terms of payments, they are beginning to be used in the following three ways:
Card networks such as Visa and Mastercard are integrating blockchain capabilities to support stablecoin debit cards and stablecoin-based settlements.
PSPs like PayPal are integrating stablecoins as a payment option, allowing purchases at PayPal merchants.
In cases like Shopify, customers can pay merchants almost directly using stablecoins held in their Web3 wallets.
Unlike prepaid funds, stablecoins are not locked into a single platform and can be used easily across multiple platforms both domestically and globally. Furthermore, beyond payments, they can be used in crypto exchanges, on-chain DeFi, games, and social services with minimal friction.
1.2.5 Payment Fee Structure
In Korea, when simple payments using prepaid funds occur, they bypass card networks and issuers, allowing the prepaid issuer to capture the entire fee. KakaoPay charges merchant fees ranging from 0.72 to 1.55 percent depending on merchant size, while NaverPay charges between 0.87 and 2.13 percent.
For stablecoin payments, if done through Visa or Mastercard’s stablecoin-supported network, existing infrastructure is used, but additional fees may arise due to on and off-ramping processes. However, in cases like PayPal or Shopify, stablecoin payments do not go through card networks or issuers, similar to prepaid funds. Still, platforms like PayPal (PYUSD) or Shopify (USDC) charge merchant fees comparable to those of credit cards.
Both prepaid funds and stablecoin payments avoid card networks and issuers, reducing the associated fees. However, even with these structures, current fees are still similar to those of credit card payments. Nonetheless, both models have strong potential to reduce merchant fees in the future.
1.2.6 Insolvency Safeguards
Prepaid issuers are required to segregate the full amount of customer funds using trust accounts, bank deposits, or insurance-backed guarantees with external financial institutions. If a prepaid issuer goes bankrupt, customers are legally entitled to first-priority reimbursement from these protected funds.
In the case of stablecoins, according to the GENIUS Act, the full value of reserves must be held in cash-equivalent assets in segregated accounts. If the issuer goes bankrupt, stablecoin holders are given priority over all other creditors when claiming against the issuer’s reserves.
2. From the User Experience Perspective
2.1 Advantages May Be Limited at First
If KRW stablecoins are introduced in Korea, would they offer clear benefits over existing prepaid instruments for everyday users? Unfortunately, in the early stages, stablecoin-based payments are unlikely to provide a significant advantage compared to prepaid payments. This is largely due to unique conditions specific to Korea compared to markets like the United States.
Recently, news emerged that NaverPay is exploring a stablecoin initiative in partnership with Upbit. Let’s use this example to consider things from a user’s perspective. NaverPay would offer Naver Stablecoin as a payment option alongside bank account payments, card payments, and NaverPay Money. Users would be able to top up their Naver Stablecoin with bank accounts or credit cards, just like with prepaid balances, and in addition, they could experience a new method of funding through on-chain deposits.
With a user experience similar to NaverPay Money, users could use Naver Stablecoin across Naver’s various services. They could also use it across other platforms and services that support Naver Stablecoin. Thanks to the partnership with Upbit, Naver Stablecoin could potentially be used for trading pairs on the exchange. Taking it a step further, users might even transfer Naver Stablecoin on-chain and use it across various DeFi services and global dApps.
But let’s stop and think. Will the average user really use on-chain deposits and on-chain services? I don’t think so. First, there are friction points in user experience due to the complexity of crypto deposit and withdrawal processes. Second, there may be limited utility due to the lack of on-chain services that support KRW stablecoins. Lastly, Korea’s strict foreign exchange laws may complicate the processes required for on-chain transfers.
2.2 Limitless Potential of Stablecoin-Based Payments
Ultimately, a fully realized form of stablecoin-based payments would closely resemble Shopify’s recent move to support USDC payments. In this scenario, users could not only make payments with stablecoins held within a platform, but also connect Web3 wallets containing various KRW stablecoins to use them across platforms like Naver, Kakao, Toss, and more. This would allow stablecoins to unify fragmented payment services and merchants into one broad platform. Furthermore, users would be able to tap into a wide range of on-chain services via their Web3 wallets.
For this vision to be realized, we must clearly define the nationality of Web3 wallets and determine how they will be treated under Korea’s foreign exchange laws. Unless Korea reforms these laws and more on-chain services begin accepting KRW stablecoins, the user experience benefits of stablecoins over prepaid funds within Korea will remain quite limited.
3. Conclusion
When comparing prepaid funds and stablecoins in Korea, they show many similarities in terms of issuance, reserve management, fee structures, and insolvency protection. However, in terms of utility, stablecoins have the potential to go beyond the boundaries of prepaid funds by extending their reach to other platforms, global services, and on-chain ecosystems. This opens up access for users to interact with countless platforms and merchants through stablecoin holdings in their Web3 wallets. For merchants, it offers the opportunity to serve a broader global customer base with ease.
In the United States, we are starting to see early signs of legacy payment and securities systems being restructured through blockchain and stablecoins. Even if stablecoins in Korea do not offer significant advantages over prepaid instruments right away, laying the groundwork and beginning adoption now will ensure that Korea is well-positioned to respond when global payments increasingly move on-chain.
