[Won Internationalization, Breaking a 30-Year Taboo]①Finally Crossing Borders... Why the Won's Status Has Lagged Behind Korea's Economic Scale

It took 30 years to enable overseas transactions of the won between foreign investors
Trauma from dollar shortages remains after the financial crises
Korean won accounts for only 1.8% of global foreign exchange market turnover
The governmen

Editor's Note
The Korean won is now at the threshold of a major transformation. The government has unveiled a 'roadmap for the internationalization of the won,' aiming to make it a freely convertible currency. While Korea's economic scale has grown substantially over 30 years of open capital markets, the status of the won still does not match that growth. This disconnect is a legacy of the traumatic collapses in won value during the Asian Financial Crisis and the Global Financial Crisis, which led to lingering restrictions on the won's free use overseas, out of fear of dollar shortages. Considering the increasing sophistication of Korea’s economic fundamentals and the advancement of its capital markets, internationalizing the won is no longer an option but a necessity.
The prerequisites for the successful internationalization of the won fall into two broad categories. On the infrastructure and regulatory side, 'the won must be usable in global markets without restrictions,' and from the perspective of supply and demand, 'the functional uses of the won must diversify to increase its widespread utilization.' This series examines what changes await the won as it breaks a 30-year taboo and stands at the starting line of internationalization, and explores what further steps are needed for the won to attain a stature befitting Korea's economic strength.

"Mr. Holmes, a British retail investor living in London, invested in SK hynix, listed on the Korean stock market, through a won-denominated account at the London headquarters of a financial company."

The Korean government has officially set the wheels in motion to internationalize the won. A major change is that, starting next year, the won will be actively traded and settled overseas. In other words, non-residents—foreigners—will be able to transact the won among themselves outside of Korea. The government formalized this with its publication of the ‘roadmap for the internationalization of the won’ on July 19.

Earlier, since July 6, the domestic foreign exchange market has been open 24 hours a day. This allows registered foreign financial institutions to trade the won without time restrictions and under domestic rules. Until now, cross-border transactions in the won faced various constraints. It has taken 30 years for foreigners to be able to transact the won amongst themselves abroad.

A Restricted Won: The Trauma of Dollar Shortages

Since Korea allowed foreign investors access to its domestic capital markets for the first time in 1992, both inbound investment by foreigners and outbound investment by Koreans have increased dramatically. However, following the implementation of the Foreign Exchange Transactions Act in 1999, foreign exchange policy continued to focus on crisis prevention through regulations. The delayed internationalization of the won stems from the traumatic experience of dollar shortages during the 1997 International Monetary Fund (IMF) crisis and the 2008 global financial crisis.

During the 1997 financial crisis, a dollar shortfall left Korean banks, corporations, and the government unable to obtain the dollars required to repay maturing foreign debts or settle import payments in a timely manner. By the end of 1997, Korea’s net external debt reached $63.8 billion, while available foreign currency reserves were only $8.9 billion.

Efforts to revise the Foreign Exchange Transactions Act in the mid-2000s also included the internationalization of the won, aiming to shift from a pre-approval regulatory model to a post-monitoring free trading model. However, the 2008 global financial crisis again thwarted such moves. As the global dollar funding market froze, Korean financial institutions struggled to secure short-term dollars—a ‘dollar liquidity crunch.’ This led the authorities to shelve discussion of won internationalization and reinforce control-oriented policies.

After these two traumatic episodes, forex authorities grew particularly wary that expanding non-resident access to the won could trigger currency speculation, capital flight, and sharp exchange rate swings. They also viewed Korea's status as a small, open economy with limited global influence as a structural constraint. Consequently, the authorities kept won trading venues, accounts, settlements, borrowings, and derivatives positions within the domestic system and under regulatory oversight.

Although foreign exchange markets are typically over-the-counter with bilateral trades, in Korea, all trades had to go through two authorized foreign exchange brokerage systems. Non-residents could only hold and settle won through non-resident won accounts at domestic foreign exchange banks. Capital transactions such as loans, securities, derivatives, and real estate were classified as requiring declaration and reporting. The concern was that if foreigners could freely borrow and move won, they could frequently engage in classic currency speculation: borrowing won, selling it for dollars in a crisis, then buying back the depreciated won later to repay the loan at a profit.

These concerns remain a key reason why, even now, the won does not enjoy sufficient recognition or value in international financial markets, despite the larger size of Korea’s economy. According to last April’s survey by the Bank for International Settlements (BIS), the won’s share in the global foreign exchange market was just 1.8% (measured as 200% of total transactions). This is 0.2 percentage points lower than the 2% observed in the 2019 survey.

NDF: How the Tail Started Wagging the Dog

Amid restrictions on offshore use and the formation of won markets outside Korea, the offshore won non-deliverable forward (NDF) market emerged around 1996. Unlike spot trades, where actual won and dollars change hands, NDF transactions involve settling only the difference in dollars at a future date, without exchanging principal. NDFs provide a means for foreigners to hedge exchange rate risk or bet on the won’s depreciation or appreciation.

As the offshore NDF market swelled relative to the onshore spot market, the need to internationalize the won became more apparent. According to the Bank of Korea, in the first quarter of this year, daily average NDF transactions reached $15.55 billion, up $3.38 billion (27.7%) from the previous quarter. This growth outpaced that of spot market transactions, which rose by 26.2% during the same period.

Offshore forward market trading is dominated by NDFs, which are typically used for non-resident trades or speculative trades requiring anonymity—transactions not captured in the Bank of Korea’s statistics. It is estimated in the market that over half of NDF trades are not for hedging but contribute to increased won volatility through speculation.

This is what is meant by ‘the tail wagging the dog.’ Seungho Lee, Senior Research Fellow at the Korea Capital Market Institute, stated, “As the volume of won-dollar NDF trades between non-residents has grown larger than the onshore market, the indirect influence on spot exchange rate determination has increased. It is mainly offshore NDF rates that exert a one-way impact on onshore spot rates.”

This phenomenon has not changed significantly, even after the start of 24-hour trading on July 6. Bank of Korea Governor Hyun Song Shin commented at a post-policy briefing on July 16 that “around-the-clock forex trading has not yet had a significant effect on reducing the NDF market.” Governor Shin had previously emphasized that demand for won NDF transactions should be absorbed into domestic deliverable forward (DF) markets, where actual currency is exchanged. To this end, the authorities plan to announce incentives for DF transactions in September. Possible measures include reducing the forward position reflection rate for DF deals or setting separate position limits. There is also discussion of reducing the macroprudential levy on foreign currency borrowings for DF settlements.

On the 3rd, market indicators such as the KOSPI, exchange rate, and KOSDAQ were displayed on the electronic board in the dealing room at the headquarters of Hana Bank in Jung-gu, Seoul.

"The Wider and Deeper the Ocean, the Calmer the Waves in a Currency Market"

The landscape has already changed significantly. In terms of external soundness and asset structure, Korea’s ability to meet foreign payment obligations is now incomparably stronger than during the 1997 or 2008 crises. Since 2014, Korea has owned more financial assets overseas than what it owes externally—a trend that has now persisted for more than a decade.

Moving far beyond the $60 billion-plus net external debt of the past, Korea became a net external creditor with $369.9 billion at the end of last year. Net external financial assets remain below $1 trillion and have begun to decline, but this is attributed to a surge in inbound investments by foreign investors following last year’s sharp rise in the KOSPI.

As of the end of June, foreign exchange reserves stood at $427.36 billion. Korea’s short-term external debt reached $183.6 billion as of the end of March, equivalent to 23.7% of total external debt of $774.4 billion. Although the ratio of short-term debt to reserves is at 43.3% (over the 40% threshold), much of this reflects hedging and trade finance demand by domestic banks and increased foreign investment following Korea's inclusion in the World Government Bond Index (WGBI). As such, market participants believe the risk of a genuine crisis remains low.

Korea’s ability to earn foreign currency remains robust. The current account surplus for January to May this year reached $141.28 billion, already surpassing last year’s record annual surplus of $123.05 billion, buoyed by a strong export performance led by semiconductors. The seasonally adjusted real GDP growth rate for the first quarter was also repeatedly revised upwards, finally reaching 1.8% quarter-on-quarter. The government’s growth projection for this year is 3%.

There is broad consensus that the recent movement of the won-dollar exchange rate—which has hovered around the 1,500 won mark—does not fully reflect the resilience of the Korean economy. Although there are various reasons for the recent depreciation of the won, the case for internationalization is stronger than ever, given that a deeper market is less susceptible to shocks. Morgan Stanley Capital International (MSCI) identified restrictions on offshore settlement and delivery of the won, as well as low liquidity in the nighttime forex market, as key reasons for keeping Korea off this year’s developed market watch list.

Analysts say policies promoting the internationalization of the won must focus on practical expansion of the currency’s use in global markets if tangible results are to be achieved. Managing new risks during the process, reducing operational difficulties for foreign institutions dealing in the won, and boosting actual demand for the won all need to proceed in parallel. Professor Sunyoung Park of Dongguk University’s Department of Economics emphasized, “Paradoxically, the deeper the market, the harder it is for any single actor to shake it. A deep market is a protective barrier against volatility.”

This content was produced with the assistance of AI translation services.