Dealing with the repercussions of the multibillion Terra-LUNA debacle, regulators in South Korea are embarking on reforms in the financial sector that could potentially include the direct involvement of banks in the country’s US$42 billion crypto industry.

“We will eventually allow domestic financial companies to do anything that global financial companies are doing,” Korean Financial Services Commission (FSC) Chairman Kim Joo-hyun said last week at the financial regulator’s first meeting to discuss regulatory reforms in Seoul. 

“The goal is to prepare the ground for domestic players in the global financial market like BTS to emerge,” he said.

“Amid the soaring interest rate, liquidity in the financial sector should not only stick to safe assets,” Kim had previously said in a speech after being appointed to the position on July 11. “It should be induced to flow into innovative sectors.”

“They believe that [Korea’s] digital finance needs innovation, and reform is a good way for the administration to differentiate itself from the last,” Korea Fintech Society (KFS) president Kim Hyoung-joong told Forkast. He is not related to the FSC Chairman.

The development comes as South Korea deals with the fallout of the Terra-LUNA collapse that cost investors billions of dollars. 

See related article: What lessons can we learn from Terra’s LUNA/UST meltdown?

South Korea’s crypto market grew to over 55 trillion Korean won (US$42 billion at current prices) at the end of 2021, with a total number of users reaching more than 15 million people, according to the Korea Financial Intelligence Unit (KoFIU). The crash hit the Korean market at its prime — affecting an estimated 280,000 investors in South Korea, with many claiming to have lost their life savings, and some even taking their own lives.

In the latest development on the saga, South Korean prosecutors have requested the Ministry of Justice that they be notified if Do Kwon arrives in the country. They have also sought a travel ban on Terra cofounder Shin Hyun-seung.

Moving ahead

“By the time regulators actually loosen the regulations [on crypto], Terra-LUNA will be a storm in a teacup,” KFS’s Kim said. “Regardless of the investigation, this government seems to believe that digital reform in the financial sector is the way to go.”

“Regardless of the investigation, this government seems to believe that digital reform in the financial sector is the way to go.”

Kim Hyoung-joong, Korea Fintech Society

The FSC will prioritize reviewing restrictions on the scope of businesses and subsidiaries of financial companies like banks and securities firms, according to the regulator’s press release

The Korea Federation of Banks (KFB) has suggested to the FSC that banks be allowed to pursue businesses in the cryptocurrency industry. Under current regulations, banks cannot acquire more than a 20% stake in a non-financial company. Moreover, banks are limited in directly operating or having subsidiaries in other businesses involved with the crypto industry. 

So far, local banks have only been able to dabble in the sizable crypto market in South Korea by investing in the sector. 

Banking on financial institutions

“There have been requests from several banks to the federation, and internally we came to a conclusion that [making the suggestion] was necessary,” a representative for the Digital Innovation team under the KFB told Forkast.

The FSC chairman’s promise to “accelerate building of infrastructure for digital finance innovation,” by “establishing a regulatory framework for emerging digital sectors such as crypto assets and fractional investments,” among other things has made the bank lobby group hopeful.

See related article: South Korean banks seek green light on crypto

“Banks have stricter internal policies and management in financial regulations, so we anticipate that the banks’ entry [into the crypto market] will contribute to the integrity of the market,” the KFB representative told Forkast.

“Once the [traditional] financial sector moves into the digital asset industry, the image and recognition of the crypto space will become more favorable to the Korean people,” because of the strict regulations overseeing the financial sector, KFS’s Kim said. “I am very optimistic about this.” 

But not everyone thinks it is for the best.

“If financial firms, including banks, can jump into crypto investment, financial distrust will increase with considerable damage to society,” Bae Jin-gyo, a lawmaker for South Korea’s Justice Party said in a press conference while responding to questions on planned financial reform.  

“If financial firms, including banks, can jump into crypto investment, financial distrust will increase with considerable damage to society.”

Bae Jin-gyo, South Korea Justice Party

Additionally, there is a risk of concentrating too much power in the hands of big financial institutions that could lead to a cornering of the market and inequality, he said. 

Already, only Upbit, Bithumb, Coinone, Korbit and Gopax are able to offer cash-to-crypto services in Korea. This was after following a rule change that requires crypto exchanges in the country to partner with a local bank so that crypto investors and traders end up using their real names to transfer funds. The rule was aimed at curbing money laundering. 

KFS’s Kim has doubts over the prospect. 

“The statement that banks will take over the space for startups just because people have a certain trust in banks is not probable,” said Kim. “They will not approve of banks expanding their crypto businesses indiscriminately into the realm of startups.”

“If banks are also allowed to invest [more] into the digital asset industry, this creates a very favorable environment for startups,” he said. “If [a startup] has a good business model, it can take it up to a bank and receive good investments,” Kim told Forkast

Still some way to go

Once the regulator approves, South Korea’s National Assembly will need to process any deregulation, the KFB representative told Forkast. “So we cannot really say when the [deregulation] will happen,” the representative added. 

Some of the 234 suggestions made by KFB include lifting the 2017 ban on initial coin offerings (ICO), allowing corporate and institutional investors access to the crypto market, and easing requirements when it comes to exchanges sharing customer information with banks.

See related article: S.Korea’s incoming administration pushes to end ICO drought

The FSC says its balanced regulatory system will lead to responsible growth in the sector. This will eventually improve the prospects of Korea-based crypto projects, according to South Korean crypto auditing firm’s founder and chief executive Jisu Park.

“More government oversight may be one of the effective ways to encourage crypto startups here to take compliance and risk management more seriously,” said Park.

KB Securities, one of the five largest securities companies in the country by revenue, announced a memorandum of understanding (MOU) with SK C&C, the information technology subsidiary under SK Group to build infrastructure and construct a platform based on digital assets. Both KB and SK C&C showed determination to adopt blockchain technology throughout their sister companies.

“Over time, people will lose interest in the Terra-LUNA case, with the investigation showing very slow progress,” Kim Hyoung-joong told Forkast. “What’s more important is that the current administration balances deregulation with the aims of becoming a G3 country in terms of the digital economy.”