Bank of Korea Rejects Bitcoin for Foreign Exchange Reserves Due to Volatility

The Bank of Korea has officially ruled out the inclusion of Bitcoin in its foreign exchange reserves, citing several key concerns that make the cryptocurrency unsuitable for such a role. The central bank's decision is based on Bitcoin's notorious price volatility, liquidity issues, and its failure to meet the standards set by the International Monetary Fund (IMF) for reserve assets.

The Bank of Korea has underscored that Bitcoin's extreme price fluctuations make it an unreliable financial asset. The central bank pointed out that recent price movements, where Bitcoin's value surged to $108,000 and then plummeted to $76,000 before stabilizing at $84,000, highlight the cryptocurrency's inherent instability. This volatility makes it impractical for use in foreign exchange reserves, which require a high degree of stability and predictability.

Additionally, the central bank highlighted that during times of financial crisis, the transaction costs associated with converting Bitcoin to cash could rise significantly. This inefficiency further disqualifies Bitcoin as a viable reserve asset, as reserves must be readily available and liquid when needed. The Bank of Korea also noted that Bitcoin lacks an investment-grade credit rating, another essential criterion for reserve assets.

The central bank's decision aligns with the IMF's guidelines, which stipulate that reserve assets must be liquid, marketable, and have a high credit rating. Bitcoin, according to the Bank of Korea, does not meet these criteria, making it unsuitable for inclusion in South Korea's foreign exchange reserves.

Despite the Bank of Korea's rejection of Bitcoin as a reserve asset, the country remains active in the digital asset space. Reports indicate that South Korea is planning to lift a long-standing ban on institutional digital asset investments, allowing corporate entities to trade in digital assets. This move could further boost the country's already thriving digital asset market, where a significant portion of the population engages in digital asset investments.

Furthermore, the South Korean government is exploring the possibility of launching a won-backed stablecoin, a digital asset tied to the country's currency. Some experts believe that stablecoins, rather than Bitcoin, will play a more significant role in future financial strategies. Professor Kang Tae-soo from the KAIST Graduate School of Finance noted the importance of whether the IMF will recognize stablecoins as foreign exchange reserves in the future.

The debate surrounding Bitcoin as a reserve asset has intensified, particularly after the U.S. President's executive order to create a national Bitcoin reserve. Some South Korean lawmakers and leaders have urged the government to follow suit, but the Bank of Korea remains steadfast in its decision. The central bank's cautious approach to digital assets reflects its commitment to maintaining the stability and reliability of South Korea's financial system.