As part of its get-tough policy on virtual currencies, South Korea prohibits banks from directly offering cryptocurrency trading services. But customer demand remains strong, and in response, banks are finding a workaround by linking with digital asset custody providers.

NH Nonghyup Bank announced on Monday it has placed a strategic equity investment in Cardo, a digital asset custodian that stores and manages virtual assets. Nonghyup’s announcement follows similar moves by KB Kookmin Bank and Shinhan Bank, which earlier made investments in digital asset custody services.

After signing a memorandum of understanding in July 2020, Korea’s NH Nonghyup Bank, blockchain developer Hexlant and a law firm named BKL initially developed a crypto custody business under the name Hexlant Custody. 

After changing its name to Cardo in August 2021, the joint venture gathered investments from NH Nonghyup Bank, Hexlant, credit card service provider Korea Information & Communications Co. (KICC), financial platform service provider Galaxia Moneytree and fintech security software developer Aton. With investments from these crypto-attentive businesses, Cardo has filed a business report to the Financial Intelligence Unit (FIU) to be registered as a legitimate virtual asset service provider.

Cardo currently runs storage and management services on Bitcoin, Ethereum, and Kakao’s Klaytn. But it plans to expand its custody services to different kinds of assets that can be tokenized, such as real estate and artwork. 

Moreover, Aton’s press release, explaining Cardo’s future plan, proposes a development of a digital asset payment service involving NFTs (non-fungible tokens) and security token offerings. Its ambition also includes reaching a wider customer base, especially millennial and Generation Z investors, by incorporating games and entertainment into its blockchain-based finance services. 

Kwon Jun-hak, CEO of NH Nonghyup Bank, said that “with this equity investment, the bank has secured competitiveness in the digital finance market through cooperation with the leading companies of the new digital technologies,” adding that the bank will expand its strategic investments in digital technology businesses.

In November 2020, KB Kookmin Bank became the first bank in South Korea to invest in a virtual asset custody service, named Korea Digital Asset (KODA), while Shinhan Bank, another major bank in Korea, set up a business agreement with Korea Digital Asset Custody (KDAC) in January 2021. NH Nonghyup is the third bank to announce its official investment in the digital asset custodian. Hana Bank and Woori Bank are also reportedly looking into following the trend.

So why are banks keen on joining the crypto space via asset custody services?

The current South Korean Banking and Financial Law prohibits banks from operating digital asset custody services directly. Despite the limit, the growing institutional demand in crypto custody services has prompted banks to participate in digital asset custody indirectly by becoming their shareholders.

Kim Hyoung-joong, director of cryptocurrency research center at Korea University, told Forkast.News in an interview that banks are still wary of what the government thinks about virtual assets. “Because the government still does not see crypto as a financial asset, these banks are trying out businesses in crypto with these custody services. If all goes well, I believe these banks will seek to expand their services onto the DeFi (decentralized finance) frontier,” Kim said.