Key Points and Expected Impact of the Won Internationalization Roadmap

The government’s push to internationalize the Korean won is a policy aimed at easing restrictions so that foreigners can obtain and hold won overseas and use it for remittances, payments, and investments. The key is not to immediately open won transactions to every overseas bank, but to permit offshore won transactions primarily through overseas financial institutions that meet certain requirements and register with the government.

The schedule and institutional details below are plans based on the announced roadmap. The actual implementation dates and detailed requirements may change depending on subsequent laws and regulations, official notices, system development, and the results of pilot operations.

What Is Won Internationalization?

Currency internationalization refers to the process by which a country’s currency becomes widely used outside its borders as a means of payment, an investment vehicle, a store of value, or a unit of account for transactions.

As won internationalization progresses, foreigners may be able to handle the following activities through won accounts at overseas financial institutions without necessarily going through banks in Korea.

• Hold won in an account or transfer it to another account
• Invest in won-denominated assets such as Korean government bonds and stocks
• Pay Korean companies in won for goods or services
• Borrow or lend won between overseas investors
• Keep won left over after travel and use it again in the future

However, won internationalization does not mean that the won will immediately become usable everywhere in the world like the dollar. Its international use will gradually expand as participation by overseas financial institutions, market liquidity, transaction costs, foreign-exchange hedging tools, and demand for Korean assets develop.

In addition, easing domestic regulations and obtaining an international status such as the IMF’s “freely usable currency” designation are separate matters. Implementing the roadmap will not automatically change the won’s international status.

How the New Approach Differs from the Existing System

Role of Offshore Won Settlement Institutions

Won accounts will not be available without restriction at every overseas bank. Won-related services will be handled by “offshore won settlement institutions,” which are overseas financial institutions that meet certain qualification and management requirements and register with the government.

These institutions will manage overseas customers’ won accounts and support won remittances, payments, and investment fund transfers. Exemptions from prior reporting are expected to apply to won-denominated capital transactions between foreigners using registered institutions, while existing reporting and verification procedures may remain for transactions that do not go through registered institutions.

The registration system is a safeguard designed to enable transaction recordkeeping, anti-money-laundering measures, prudential oversight, and market stability management while opening the market. Actual users must separately verify whether an overseas bank is a registered institution and what won-related services it provides.

Implementation Schedule and Phases

The main schedule based on the announced roadmap is as follows.

The pilot operations are likely to assess settlement stability, internal controls at overseas financial institutions, liquidity management, and transaction reporting systems. Therefore, it cannot be assumed that the institutions participating in the pilot and the scope of application at the time of formal implementation will be the same.

How Actual Transactions May Change

Holding and Transferring Won by Individuals Overseas

A resident of Japan may be able to keep won left over after a trip to Korea in a won account at a local financial institution and later transfer it to a family member’s won account. This could reduce the process and cost of converting won into yen and then back into won each time.

Investment in Korean Assets by Overseas Institutional Investors

A U.S. asset management company could open a won account at a registered local financial institution and use it to settle purchases of Korean government bonds or other won-denominated assets. Delays in currency conversion and settlement caused by the time difference with Korea could also be reduced.

Won-Denominated Trade Settlement by Overseas Companies

If a German company pays a Korean supplier directly from its won account, it would not need to use the dollar as an intermediary settlement currency. If the parties agree on a price in won, they could reduce double currency conversion costs and some exchange-rate risk.

Why the Government Is Pursuing Won Internationalization

Improving Access for Foreign Investors

Foreign investors must obtain won before trading Korean assets. If they can reliably obtain won overseas and settle transactions around the clock, friction related to account opening, currency conversion, and time differences will decrease.

Alongside won internationalization, the government plans to pursue the following improvements in capital market accessibility.

• Expand automated infrastructure for securities trading and settlement
• Improve foreign investor registration procedures
• Expand English-language corporate disclosures
• Broaden the permitted scope for obtaining won using government bonds as collateral
• Improve short-term financial products for investing temporarily held won
• Permit won lending and borrowing between overseas investors

These measures are intended to reduce market accessibility issues that global index providers such as MSCI and international investors have pointed out. However, institutional improvements do not guarantee inclusion in or an upgrade within any particular global index.

Reducing Currency Conversion Costs and Risks for Exporters

When Korean exporters receive payments in dollars, they incur fees when converting them into won. If the exchange rate changes between the contract date and the payment date, the value of revenue converted into won also changes.

If overseas customers pay directly in won, Korean companies can reduce some currency conversion costs and exchange-rate risk. Conversely, overseas buyers would have to bear the risk of won fluctuations. For won-denominated payments to increase in practice, markets where overseas companies can easily obtain won and hedge their risks must also develop.

The government is considering the following measures to encourage won-denominated payments.

• Provide export financing benefits for won-denominated intergovernmental procurement contracts in areas such as defense and nuclear power
• Consider lowering export financing interest rates when import and export payments are settled in won
• Consider raising trade insurance support limits
• Expand direct trading systems between the won and the currencies of major trading partners

Expanding Access to Financial Services

If foreign-exchange trading hours and settlement networks are expanded, domestic investors trading overseas stocks at night are more likely to receive the market exchange rate at the time of the transaction instead of a provisional rate. As domestic financial apps become more closely connected to overseas payment networks, more regions may allow payments via QR codes and other methods without requiring users to convert won into local currency in advance.

These services will not be provided automatically through won internationalization alone. Separate partnerships between financial institutions and overseas payment providers, compliance with local regulations, fee structures, and technical integration will be required.

Expected Benefits

If the use of won and investment in Korean assets increase, the depth and liquidity of financial markets may improve. However, it is difficult to conclude that internationalization will directly raise the economy’s potential growth rate. It may contribute to medium- and long-term growth when increased investment, changes in funding costs, and greater trade activity lead to productivity gains and real investment.

Potential Risks to Exchange Rates and Financial Markets

Greater Volatility in the Won’s Value and Exchange Rate

If the won is traded overseas around the clock, news and global capital flows will be reflected in its price even when Korean markets are closed. If there are enough market participants and sufficient liquidity, price discovery may improve. However, during periods of thin trading, even small orders may cause large price movements.

If overseas investors borrow and then sell won on a large scale, the won’s value may fall and the won-dollar exchange rate may rise. Conversely, if funds flow rapidly into won-denominated assets, the won’s value may surge.

Faster Transmission of Overseas Shocks

When a global financial crisis or geopolitical shock occurs, investors tend to sell risky assets and favor safe-haven assets such as the dollar. If the won can be traded immediately overseas, these movements may be transmitted more quickly to Korea’s foreign-exchange market and asset prices.

Price Gaps Between Offshore and Domestic Markets

If liquidity or regulations differ between the offshore won market and Korea’s domestic foreign-exchange market, exchange rates may differ even at the same time. If these price gaps persist, speculative trading may increase or settlement costs may become unstable.

Foreign-Currency Liquidity Burden

If companies and financial institutions seek dollars at the same time during periods of market stress, foreign-currency funding costs may surge. Won internationalization is a policy aimed at increasing the use of won, but it does not eliminate demand for dollars during a crisis, so sufficient foreign-currency safety nets are necessary.

Safeguards Being Prepared by the Government and the Bank of Korea

Alongside opening the market, the government plans to establish the following management systems.

1. Enhancing the usability of public-sector foreign-currency assets: Improve systems for supplying dollar liquidity to the market during a crisis by using foreign-exchange reserves or the Foreign Exchange Stabilization Fund.
2. Expanding currency swap arrangements: Broaden emergency foreign-currency funding channels through bilateral currency swaps.
3. 24-hour market monitoring: Strengthen nighttime monitoring by the government and the Bank of Korea to track sudden price changes, trading volume, and exchange-rate gaps between domestic and overseas markets.
4. Developing offshore liquidity indicators: Establish indicators to continuously monitor trading volume and funding conditions in overseas won markets.
5. Supervising registered institutions: Oversee the financial soundness, transaction reporting, anti-money-laundering measures, and internal controls of offshore won settlement institutions.

Foreign-exchange reserves are a tool for easing market instability, not a source of funds for fixing the exchange rate at a specific level. Whether intervention occurs and its scale will depend on market conditions and policy judgments at the time.

Indicators to Monitor After Implementation

The performance and risks of won internationalization should be evaluated by examining the following indicators together.

• Number of registered offshore won settlement institutions and their distribution by country
• Outstanding overseas won deposits and average daily trading volume
• Share of trade settled in won
• Foreign holdings of won-denominated assets such as government bonds and stocks
• Won funding rates and foreign-exchange hedging costs
• Price differences between domestic and overseas won exchange rates
• Exchange-rate volatility and trading volume during nighttime hours
• Foreign-currency liquidity indicators and dollar funding costs during crises

Success should not be judged solely by increased trading volume. Lower transaction costs, stable market liquidity, use of won in real-economy trade, and crisis response capabilities must also be assessed together.

What Individuals and Companies Should Know

• Because pilot operations differ from full implementation, users must verify which countries and financial institutions offer access.
• Even for offshore won accounts, deposit protection, fees, and taxes may be governed by the rules of the relevant country and financial institution.
• Settling in won does not eliminate exchange-rate risk; it may transfer the risk to the counterparty.
• Existing reporting obligations will remain for domestic real estate transactions and certain capital transactions that do not go through registered institutions.
• Won remittance and payment functions in overseas financial apps may not be introduced simultaneously across all providers in line with the government’s schedule.

Key Takeaways

The won internationalization roadmap is a policy to expand institutional channels for holding won overseas and using it for payments, remittances, and investments. It may encourage foreign investment in Korean assets and won-denominated trade settlement by companies, but as the overseas won market grows, managing exchange rates and foreign-currency liquidity will also become more difficult.

The policy’s success will depend not merely on removing regulations, but on whether sufficient market liquidity, reliable settlement networks, participation by overseas financial institutions, foreign-exchange hedging tools, and 24-hour monitoring and crisis response systems are established together.