[Won Internationalization, Breaking a 30-Year Taboo]③ "Issuance of Won ETFs and Easing Regulations on Won Export-Import Accounts"...Challenges Beyond the Roadmap

Roadmap Ensures Stability by Combining Broader Market Access with Risk Management

Eased Regulation, But Limits Remain Compared to Key International Currencies


Next Steps: Securing “Depth of Won Liquidity” Beyond the Roadmap

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Editor's Note
The Korean won stands at a turning point of great change. The government has unveiled its "won internationalization roadmap," aiming to convert the won into a freely convertible currency. More than 30 years have passed since Korea opened its capital markets, during which time the nation's economy has grown significantly, yet the global status of the KRW still lags behind. This discrepancy is largely due to the trauma experienced during the foreign exchange and financial crises, which led Korea to impose constraints on the overseas use of the won to prevent drastic slumps in its value when the dollar supply is tight. Given the need to advance the fundamentals of the Korean economy and modernize its capital markets, the internationalization of the won has become an essential task.
There are two main preconditions for successful won internationalization: First, from an infrastructure and regulatory perspective, there should be no obstacles to the free use of the won in global markets; second, from the demand and supply side, the uses of the won should be diverse and widely available. In this special report, we examine the changes the won is about to undergo as Korea lifts a 30-year taboo and embarks on the path of internationalization, and discuss what is still needed for the won to rise to a status befitting Korea’s economic strength.

Experts cite two prerequisites for the internationalization of the won: it must be easy to access, and it must be practical to use. In this respect, the inclusion of foreign exchange regulatory easing and various incentives in the new roadmap marks a notable shift. However, some voices argue that full convertibility and universal acceptance of the won will ultimately require complete market liberalization. Others suggest that diversifying financial products, such as issuing won-denominated exchange-traded funds (ETFs), is necessary to broaden the demand base for the won.

The Internationalization of the Won: Similarities and Differences to the Australian Dollar

The internationalization model for the won presented in the government’s roadmap is, according to experts, reminiscent of the Australian dollar—a medium-sized, freely convertible currency. Australia eliminated most of its foreign exchange controls in 1983. Since then, it has stimulated deposits in Australian dollars in international financial markets such as London, and boosted capital inflows by exempting withholding tax on bond interest.

Korea’s plan to extend foreign exchange market hours to 24 hours, and open its markets further to overseas institutions, is viewed as similar to Australia’s approach to overcoming the limitations of a small open economy. However, unlike Australia, which nearly fully liberalized foreign exchange controls to make the AUD entirely free-floating, Korea has opted for a gradual easing of reporting regulations on foreign exchange transactions as it internationalizes the won. Notably, Australia removed most restrictions on overseas financial institutions holding the Australian dollar, while Korea, even as it introduces its new offshore KRW clearing institution system, will maintain a relatively narrow opening, relying mainly on the headquarters of already trusted overseas foreign exchange business institutions (RFIs). Nevertheless, foreign investors will now be able to hold Korean won offshore without needing to open separate accounts with domestic banks or foreign bank branches in Korea. This should resolve much of the account opening friction previously cited by global investors.

“Opening Up with Safeguards”: Effective Measures Lower the Entry Barriers to the Won

Academia welcomes the fact that the roadmap accepts the proposal to "open but monitor," even if it does not mark full liberalization. Scholars have repeatedly pointed out the need to reduce entry barriers to the won for nonresidents, moving away from a structure overly reliant on offshore non-deliverable forward (NDF) markets. The roadmap now lays the basic groundwork for this transition, incorporating measures such as expanding access for foreign investors to Korea’s domestic securities markets, allowing offshore lending of won-denominated bonds, increasing incentives for current account transactions, and invigorating local currency trading systems (LCT), among other initiatives to encourage wider use of the won.

Besides simply broadening access to the won, the roadmap ties in risk management with expanded participation by domestic foreign exchange banks in custodial services—effectively ensuring genuine market stability. Professor Park Sunyoung of the Department of Economics at Dongguk University commented: "It is a positive step that market depth and settlement plumbing were put in place before broadening accessibility, and that risk management is not just a formality."

Of particular note is that as foreign exchange regulations are relaxed and nonresidents are allowed to issue offshore won-denominated securities to other nonresidents, access to won assets for nonresidents will improve. Professor Park said, "If won-denominated bonds are issued in New York or London, this will generate demand for nonresident won assets and create a virtuous cycle, expanding the offshore won pool. Offshore currency-denominated bond markets, such as Dim Sum bonds, Samurai bonds, and Kangaroo bonds, are classic channels of internationalization."

The plan is to allow issuance below a certain threshold (exact amount to be determined) to be reported ex post, with the possibility of further relaxation after reviewing market response post-implementation of the roadmap. In Australia, a major reference point for won internationalization, nonresidents may issue euro- or AUD-denominated bonds or make simple interbank transfers, with issuers or investors reporting to the Australian Transaction Reports and Analysis Centre ex post, regardless of the transaction amount.

Academics generally support the roadmap's phased approach, noting that monitoring and responding to speculative currency forces is not easy. Lee Jeonghwan, professor at the Department of Economics and Finance at Hanyang University, observed, "From the perspective of the authorities and investors, the opening of the offshore foreign exchange market is a fundamentally opposing issue. While opening the market becomes more necessary as the economy grows, rapid exchange-rate swings or unchecked activity from hedge funds can make it harder to respond, which is why a gradual approach is clearly needed."

Nevertheless, there is a consensus that the measures in the roadmap must be executed promptly. Chung Youngsik, Senior Research Fellow at the Korea Institute for International Economic Policy, noted, "If Korea had not experienced the foreign exchange crisis, there would be no need for intermediate steps. Once monitoring shows that risks are under control post-implementation, a more forward-leaning approach would be appropriate." He added, "Recently, volatility in domestic capital markets, including equities, has increased, so market resilience must also be confirmed."

The Regulatory Bar Has Been Lowered, But the Won Remains a Controlled Currency

Actual foreign exchange market participants expressed disappointment that the plan does not represent full liberalization. Byun Jungkyu, Head of FICC at Daiwa Securities Korea, said, "The premise for won internationalization is 'free' and 'comfortable' trading," and that "like the dollar or euro, the won needs to be usable without controls to fully meet this premise." He further added, "It’s about moving away from a permit system so that remittances and receipts are truly unrestricted and free."

Some questioned the efficacy of the government's decision to double reporting thresholds for foreign exchange banks' borrowing of foreign currency by nonresidents (previously required reporting to the Ministry of Economy and Finance for borrowings exceeding USD 50 million and maturity over one year), and won-denominated loans (bank reporting required for lending from KRW 1 billion to 30 billion to the same entity, Bank of Korea reporting for amounts exceeding KRW 30 billion). An anonymous foreign exchange market source stated, "There is already a system to borrow dollars with collateral through FX swaps. Raising the loan cap from 30 billion to 60 billion won is unlikely to markedly increase actual lending. If regulations were previously at a score of 50 out of 100, this is like lowering them to 40—so the real effect or performance is likely to be minimal."

After the Roadmap: Proposals to Issue Won ETFs, Easing Nostro Account Regulations, Expanding Won-Denominated Loans

To attract more inflow of won investment in the capital markets, some suggest expanding the range of products by allowing the issuance of won-denominated ETFs in the future. Both the Australian and Canadian dollars have currency ETFs to promote capital market activity, strengthen international demand for their currencies, and increase flexibility in foreign exchange management. As of the July 17 closing price, the Australian dollar ETF (FXA) listed on the New York Stock Exchange had a market capitalization of USD 104.7 million (approximately KRW 14.5 billion), while the Canadian dollar ETF (FXC) had a market capitalization of USD 76.769 million (approximately KRW 10.64 billion).

Professor Park noted, "Morgan Stanley Capital International (MSCI) has just upgraded the 'availability of investment products' score. If won-denominated bonds and won ETFs increase in New York and London, it will generate demand for nonresident won assets, expand the offshore won pool, and create a virtuous cycle, ultimately achieving the depth in offshore markets that MSCI is looking for."

Another suggestion is to consider ways to further increase the uses of the won beyond just incentives for current account settlements. Market participants point out that, for example, regulations on Nostro accounts—used for handling overseas remittances and foreign exchange settlements—should also be greatly eased. There are currently restrictions on cross-border won transfers, and regulatory authorities maintain very strict controls on credit extension.

Another anonymous foreign exchange market source said, "Exports of semiconductors and IT advanced industrial products are currently in such short supply that buyers are willing to pay premiums. If Nostro account regulations ease and it becomes easier to settle in won, large corporations, their partners, and small and medium-sized companies would no longer need to hedge the dollar, fundamentally expanding the use of the won."

Some also suggest that initiatives at the diplomatic level can be helpful. In Japan, which ranks fourth in the world for official development assistance (with annual overseas aid of KRW 23 trillion), 68% of this aid is in concessional loans, and those loans are denominated 100% in yen by principle. This results in the equivalent of KRW 15.6 trillion distributed annually in yen to overseas markets. For Korea, this means increasing both the proportion of concessional loans (currently 30–40% of total aid) and the share of won-denominated aid (currently around 80%). The overall scale of Korea's concessional loans is about KRW 5.4 trillion per year. Senior Research Fellow Chung stated, "Expanding won-denominated concessional loans or ODA might not immediately make the won fully international, but could break new ground and play an important facilitating role."

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