What happened?
South Korea has lifted a 14-year ban on local institutions investing in foreign currency-denominated bonds issued for domestic use. This decision comes amid increasing capital outflows and a high demand for dollar-backed stablecoins, aiming to improve foreign exchange liquidity and ease pressure on the won. The Bank of Korea now allows banks, securities firms, and insurers involved in foreign exchange operations to invest in these “kimchi bonds.”
Who does this affect?
This change in policy affects South Korean financial institutions such as banks, securities firms, and insurers that deal with foreign exchange operations. It also has implications for investors who are keen on investing in overseas stocks and stablecoins. On a broader scale, the easing of restrictions could impact various stakeholders in the South Korean financial market, including those involved in the issuance and trade of kimchi bonds.
Why does this matter?
The policy shift is significant for the market because it aims to stabilize the foreign exchange market and support South Korea’s strategy to become a regional financial hub. Easing restrictions on kimchi bonds is expected to enhance foreign currency liquidity, which could alleviate downward pressure on the Korean won and revitalize domestic capital formation. Additionally, this move reflects South Korea’s adaptive approach in response to the evolving digital finance landscape, including a growing emphasis on stablecoins over a national digital currency.