Korea Investors Service prepares to rate credit in digital finance

Korea Investors Service (KIS) is developing new criteria to assess the credit risks of digital financial products as tokenized securities and stablecoins become more integrated into the mainstream financial system.

The Moody's affiliate said Monday that digital financial products can carry risks that differ from those of conventional products, even when they have the same credit rating.

"While automation and instant settlement can reduce costs, reliance on the platforms, smart contracts and on-chain settlement that enable them can also create new channels through which disruptions and losses spread," Chung Hyuk-jin, head of KIS' credit standards group, said at a media briefing.

Chung said credit assessments of digital financial products should incorporate technological risks alongside traditional measures such as an issuer's repayment capacity, the credit quality of underlying assets, collateral and repayment priority.

KIS groups those risks into four categories: platform risk, smart-contract risk, external risk and risks related to the representation of legal rights.

Stablecoins have become a major focus globally as the market has expanded rapidly since 2020 to about $300 billion.

Kim Hong-mi, head of KIS' Structured Finance 2 Department, said global rating firms have already developed frameworks for assessing stablecoins. S&P focuses on redeemability, while Moody's examines both redemption capacity and the ability to maintain a stable value against fiat currencies.

KIS' own framework will depend in part on Korea's legal and regulatory regime, Kim said. Rules governing eligible reserve assets, asset weightings, average maturities and capital requirements could shape how stablecoins are assessed.

Qualitative factors may also play a role, including an issuer's shareholder base, the creditworthiness of its shareholders, business relationships and potential synergies, she said.

KIS discussed the framework at its first digital finance conference Monday at Conrad Seoul. Participants included Mirae Asset Securities, Shinhan Financial Group, Binance, Dunamu, Toss Bank, Kim & Chang and Koscom.

"For the market to continue growing, speed and efficiency alone are not enough. Transparency, accountability, stability and comparable risk information must also be in place," said Patrick Yoon, CEO of KIS. "KIS will contribute to the sound development of financial markets by providing information the market can trust and balanced perspectives."

The National Assembly is preparing to legislate the Digital Asset Basic Act, which is intended to provide a comprehensive regulatory framework. Debates are ongoing over provisions involving eligibility requirements for stablecoin issuers and a proposed 20 percent ownership cap on major shareholders of cryptocurrency exchanges, among others.