At the stroke of midnight tonight in South Korea, crypto investors will be left with less than half the number of existing exchanges for their transactions. The country’s new regulations for crypto exchanges will go into full effect at the beginning on Saturday, when 35 exchanges that haven’t complied with new crypto exchange requirements will be forced to shut down. This leaves four major exchanges as well as 24 smaller ones that may survive once they delete all functions supporting cash transactions.
The Financial Services Commission (FSC) set two major requirements. Exchanges must first receive an Information Security Management System (ISMS) certification, which proves their capabilities in protecting users’ personal information. Next is a partnership with a local bank in Korea to provide crypto exchange users with withdrawal and deposit bank accounts under their real names. This is to lower the risk of crimes such as money laundering, embezzlement or price manipulation.
So far, the four major exchanges — Upbit, Bithumb, CoinOne and Korbit — out of 63 crypto trading platforms have achieved the requirements fully and submitted the compliance report to the Financial Intelligence Unit (FIU). Upbit’s report has been reviewed and accepted by the FIU while the other three are still under examination. Once the three receive the green light, these four exchanges will be the only virtual asset trading platforms to provide all services lawfully.
It’s a different story for the rest. Thirty-five exchanges that have failed to meet the two requirements will be wiped out in less than a day. Twenty-four exchanges that have managed to receive the ISMS certification but not the bank partnership have been ordered to suspend all services dealing in cash-to-crypto transactions and must operate solely based on token-to-token exchanges.
As the Korean won-to-crypto trades make up nearly 90% of the total virtual asset transactions in the country, these exchanges were in a scramble to affiliate local banks. However, major banks including KB Kookmin, Woori and Hana Bank refused to be involved with virtual asset exchanges. Most of the 24 exchanges have subsequently closed down their cash-to-crypto operations.
Only one medium-sized exchange, Gopax, had assured users that a bank partnership was imminent. It even held a special Bitcoin giveaway event for users who pre-register for real-name withdrawal and deposit accounts. Gopax had reportedly been discussing the partnership with Korea’s regional Jeonbuk Bank. However, Gopax announced the morning of the deadline their real-name account deal fell through, and that it will be closing the Korean won services shortly.
Chung Seung-mo, a user of Gopax, says he experienced a great loss from the sudden news. “Last night, Creditcoin (CTC) was traded at 4,300 won. Right now, it’s at 3,100. Because Creditcoin is only listed on Gopax, the announcement caused more than a 30% loss,” Chung said, adding the exchange should have alerted the users earlier.
Experts say the requirements are more difficult for smaller businesses to meet as preparing for the ISMS certification alone costs more than US$250,000. Lee Jang-woo, adjunct professor at Hanyang University, says such pain points need to be addressed in the virtual asset industry law currently under development. “The regulatory structure right now is hard for start-ups to follow. I believe that the new law needs to relieve companies that are smaller than a certain size from strict regulations to foster innovative growth in the industry,” Lee said.
Lee also says the systemization of exchanges and cryptocurrencies will allow Korea’s blockchain and crypto space to move on to its next phase — DeFi (decentralized finance). “Before the regulations, there was a disorder in the space; anyone could open an exchange and build their own cryptocurrencies,” Lee said. “This concentration on tokens and crypto trading prevented Korea from moving onto DeFi, which has become a trend in the rest of the world.”