South Korea Aims to Make Won a 'Freely Convertible Currency'

South Korea will step up efforts to improve access to the Korean won with the goal of making it a "freely convertible currency," the finance ministry said Sunday.

The Ministry of Finance and Economy unveiled a road map for the internationalization of the Korean won, which refers to creating an environment in which foreigners face no barriers to obtaining or using the currency outside South Korea.

"To achieve the internationalization of the won, we need to complete the establishment of offshore won transaction and settlement systems and remove institutional restrictions," the ministry said.

The government said the internationalization of the won is essential, considering South Korea's strong economic fundamentals and the advancement of its capital market system.

"Once the internationalization of the won has sufficiently progressed, it is expected to generate positive effects, including the development of the capital market and lower transaction costs for businesses," it said.

"Businesses will face lower costs in raising funds, exchanging currencies and hedging against foreign exchange risks," it added. "The impact of foreign exchange volatility on the real economy will also be mitigated."

While South Korea officially launched a 24-hour foreign exchange market earlier this month, the government pointed out that foreigners still face structural hurdles in freely obtaining and using the Korean won overseas due to the lack of offshore infrastructure.

Other hurdles include requirements for foreigners to open accounts at domestic foreign exchange banks to settle transactions in Korean won, as well as prior reporting requirements for certain capital transactions.

To address such hurdles, the government said it plans to improve foreign exchange regulations and market practices, building on the recent launch of the around-the-clock foreign exchange market.

In detail, the government plans to revise the methodology for calculating the benchmark exchange rate used for accounting, taxation and transactions to align it with global standards by replacing the current market average rate (MAR) with the time-weighted average price (TWAP).

South Korea will also introduce electronic foreign exchange guidelines in August to enable automated overnight trading without personnel on duty.

Other measures include allowing foreigners to settle transactions through Korean won accounts held at offshore won settlement institutions without opening accounts at domestic banks.

To promote the use of the Korean won in trade transactions, the government will provide various incentives for South Korean companies to use the currency in international trade, including expanding trade insurance coverage limits.

"South Korea will establish a multi-layered risk management system by securing external financial safety nets, advancing foreign exchange policies and ensuring coordinated implementation of policy measures," it added.