Virtual asset investment became hot among South Koreans in 2021. The daily trade volume of cryptocurrencies exceeded that of the stock market several times, and more than 40% of younger Koreans in their 20s and 30s have invested in virtual assets, according to a recent survey.
One might assume that crypto investment fever brought immense profit for virtual asset trading platforms in the country. While that might be true for a handful of exchanges, the rest took a painful hit to their business resulting from strict new crypto regulations.
On March 25, 2021, South Korea’s new amendments to “The Act on Reporting and Use of Certain Financial Transaction Information” went into full effect. The Financial Services Commission (FSC) — the country’s top financial regulator — promised investors a safer and more transparent trading environment by requiring the trading platforms to meet two main standards.
The first requirement was obtaining an Information Security Management System (ISMS) certification, which verifies that a virtual asset business meets government standards for the protection of their users’ personal information. The second was securing a contract with a local bank to provide exchange users with Korean won withdrawal and deposit bank accounts under their real names. This helps financial regulators track down unfair trade practices that take advantage of anonymity, such as price manipulation or embezzlement. The new amendments also included a standard that executives of a virtual asset operator not have any financial crime-related charges in their background within the past five years.
The FSC gave virtual asset exchanges six months, until Sept. 24, to fully meet these new requirements, by submitting a compliance report to the Financial Intelligence Unit (FIU). Any exchange that failed to do so faced closure. As a result, only four major exchanges — Upbit, Bithumb, Coinone and Korbit — were able to fully comply with the new regulations. Around 36 exchanges closed down, while 25 other exchanges that had acquired the ISMS certification but not the real-name bank account contract were granted leeway to continue operation without servicing cash-to-crypto and only token-to-token, while the FIU reviewed their reports.
The FIU has approved 16 exchanges — four fully functioning exchanges and 12 token-to-token exchanges — while another 13 exchanges without the bank partnership wait for their results.
The four major exchanges, which had already been the dominant players in the industry, became untouchable as investors flocked over to exchanges where they could easily liquidate their crypto holdings. Upbit, out of the four, currently dominates the country’s virtual asset market, reaching up to 85% of total market share. Its operator, Dunamu, started to branch out its successful business in other blockchain-induced ventures. It has opened a beta version of its own NFT (non-fungible token) marketplace, while in October it partnered with HYBE, the music agency behind global K-pop sensation BTS, to release fan collectibles of the boy band. Dunamu is also affiliated with other K-pop powerhouses JYP and YG Entertainment for NFT ventures as well.
With its monolithic share in the cryptocurrency market, Upbit’s Dunamu also became the first ever blockchain fintech company to acquire a stake in a traditional financial institution. On Nov. 22, Dunamu purchased 1% of Woori Financial Group, which owns one of South Korea’s leading banks, Woori Bank.
Of the other three major exchanges, Bithumb is preparing to launch a live commerce platform utilizing NFTs and the metaverse. Korbit is expanding its NFT marketplace and a metaverse named “Korbitown,” with investments worth over US$75.4 million from local conglomerate SK’s investment subsidiary SK Square, which is also metaverse-focused. Coinone announced a major recruitment plan and a 20% salary raise for all employees, promising an all-rounded business growth.
On the other side of the hedge, things are looking quite different. Smaller exchanges that were not able to secure the bank contract are running after survival, not expansion.
In a forum discussing the difficulty of survival for small-to-medium sized exchanges under the crypto regulations back in September, Do Hyun-su, CEO at ProBit, said: “Token-to-token transactions have no business feasibility. It’s a temporary way to operate until exchanges earn the bank contract.” As no other exchanges apart from the four major companies have obtained the bank partnership since the regulatory deadline, their trade volume and number of users experienced steep decline. According to the FIU, the amount of deposits in small to medium exchanges decreased 62%.
Hence, their first and foremost endeavor remains in finding a local bank partnership to reopen cash-to-crypto services.
COREDAX, one of the South Korean exchanges that are registered under the FIU, told Forkast.News that it is focusing on acquiring the bank contract and in strengthening the security of the exchange rather than developing new ventures.
Lee Byung-uk, professor of digital finance at Seoul School of Integrated Sciences & Technologies (aSSIST), told Forkast.News that it will not be easy for those smaller exchanges to achieve the contract. “It is unlikely that any more exchanges will earn the real-name contract, as banks will have to take on joint responsibility for preventing money laundering in crypto exchanges.”
From a bank’s perspective, being involved in any violation of financial law does too much damage to its reputation and business, which is all about gaining its user’s trust. Thus many banks chose not to provide the real-name accounts to crypto exchanges, many of which are not yet fully confirmed of its reliability, because they believe the risk is greater than the return that transpires from the partnership.
Thus exchanges concentrate on upgrading their anti-money laundering (AML) and know-your-customer (KYC) measures. Probit has set up a five-stage KYC verification process for users while Foblgate has announced strengthening its Suspicious Transaction Reports (STR) and Fraud Detection System (FDS).
Nevertheless, Park Sung-jun, head of Dongguk University’s blockchain research center and CEO of Andus Co., Ltd. says he is hopeful that new regulations for the virtual asset industry may open up opportunities for several other exchanges to obtain real-name bank contracts. As new laws further institutionalize crypto businesses, banks may begin to review the partnership more positively. In the meantime, Park says exchanges need to foray into new markets instead of focusing on the cryptocurrencies to increase accessibility for customers.
Huobi Korea has recently announced a partnership with Korea Real Estate Investment & Trust (KOREIT) to start a virtual asset custody business that will support cryptocurrencies and NFTs of users, along with plans to provide management for e-wallets.
Peertec, the operator of GDAC exchange, is also working with South Korean conglomerate SK C&C in developing an NFT solution where real estate and other physical assets will be digitized and traded in virtual assets.
At the end of the do-or-die regulations on crypto exchanges, Kim Hyoung-joong, president of the Korea Society of Fintech Blockchain, says that smaller exchanges only allowed to provide token-to-token services are left in a deadlock. “Some may be preparing to open an NFT marketplace. But currently, token-to-token exchanges are having a hard time even paying wages to their employees.”