Ban on Kimchi bonds ends; Singapore’s new law kicks in

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South Korea has lifted a 14-year ban on Kimchi bonds to ease a lack of liquidity in the foreign exchange market amid a spike in USD-backed stablecoin usage.

The Bank of Korea (BoK) announced the reversal this week in its latest move to relax the strict regulations in the forex market, which has taken a beating in the past 18 months due to political instability and economic headwinds.

At the end of April, the country’s forex reserves dipped to $404 billion, its lowest since mid-2020.

“This measure is expected to contribute to resolving the imbalance in forex supply and demand by improving foreign currency liquidity conditions and easing pressure on the weak won,” the central bank said in its statement.

Kimchi bonds are denominated in foreign currencies, such as the U.S. dollar and the euro, and can be issued by local or offshore companies. BoK first banned these bonds in 2011 following a spike in short-term overseas debt, a pattern that had preceded two previous financial crises in 1997 and 2008. The central bank further claimed that local firms were raising funds via Kimchi bonds to circumvent limits on foreign debt for local use.

Now, the bank is walking back the restrictions as the rise in stablecoin adoption threatens the forex market liquidity. In the first quarter, South Koreans invested 57 trillion won ($42 billion) in offshore digital assets.

Under the new administration of President Lee Jae‑myung, digital assets are set to blow up even more. The ruling Democratic Party is pushing for enabling laws to boost adoption, including dropping the capital requirement for stablecoin issuers to under $400,000, a 90% reduction from a previous draft. In contrast, issuers require $3.2 million in paid-up share capital to operate in Hong Kong.

Beyond stablecoins, South Koreans are pouring a record amount of capital into ‘crypto’ stocks. Data from the country’s central securities depository shows that Circle (NASDAQ: CRCL) was the most popular overseas investment in June.

But it’s not just digital assets that threaten the South Korean forex market and the strength of the won. Continued rate cuts to stimulate a slowing economy have made local assets less attractive, while weak exports have drastically cut down the inflow of the much-needed U.S. dollars.

New regulations that require virtual asset service providers (VASPs) based in Singapore but offering services abroad to obtain a new license have kicked in, and it could lead to a mass exodus from one of the world’s leading digital asset hubs.

In early June, the Monetary Authority of Singapore (MAS) set a June 30 deadline for local VASPs to cease serving overseas users or obtain a new license. Under an Act passed by legislators in 2022, VASPs serving local users were more leniently regulated, with those targeting offshore clients concerning the MAS as oversight would be more difficult.

The financial regulator has now curbed the regulatory arbitrage window that some of the world’s largest VASPs have capitalized on for years. Any company, partnership or individual serving clients outside Singapore must obtain a new Digital Token Service Provider (DTSP) license.

MAS has made it clear that it will extend no grace period for compliance. The new restrictions will also apply regardless of how small the overseas clientele is to the VASP’s overall user numbers.

Any VASP that operates post-June 30 without the new license faces a $200,000 fine, while the operators could end up behind bars for up to three years.

‘Crypto’ firms are known to rush at the last minute to obtain licenses only after the regulators begin enforcement. However, in Singapore, this approach is unlikely to work as MAS has stated that it will only issue the new DTSP license in ‘extremely rare’ cases.

Global exchanges based in Singapore are already exploring moves to friendlier jurisdictions, with Dubai and Hong Kong the most likely destinations. Bybit and Bitget, which are among the largest exchanges globally, are among those weighing relocation, Bloomberg reports.

However, Binance intends to keep around 400 of its Singaporean employees in the country despite the new crackdown. Sources told Bloomberg that the Binance employees will most likely be unaffected as they mainly focus on back-office activities. Additionally, Binance is notorious for avoiding physical presence and refuses to confirm with media outlets if it has an office in the city. However, it’s not licensed by the MAS as an exchange like Bybit, Bitget, and some of its other peers.

Watch: Breaking down solutions to blockchain regulation hurdles