South Korea Enhances Oversight of Cryptocurrency Marketplaces


In response to the burgeoning cryptocurrency sector, South Korea’s Financial Service Commission has initiated a comprehensive regulatory update. This shift is poised to lead to the closure of approximately two-thirds of the nation’s cryptocurrency exchange platforms, evoking a monetary impact exceeding Won3tn ($2.6 billion).

As a substantial player in the global crypto arena, South Korea represents roughly 5 percent of worldwide crypto trades. The Korean won ranks as the third most used fiat currency in Bitcoin transactions, following the US dollar and the euro.

In its quest for heightened oversight, the FSC has set a stringent deadline of September 24 for both domestic and international exchanges to secure registration as lawful trading venues or risk termination under the nation’s Information Security Management System (ISMS) protocols. Additionally, the government is considering a prohibition on cross-trading. This decision trails the introduction of new anti-money laundering (AML) guidelines that took effect on March 25, 2021.

Crypto exchanges FSC for bitcoin

Bitcoin’s value skyrocketed to over $60,000 in April.

The FSC has alerted exchanges that fail to align with the new regulations to forewarn their customers about potential closures by September 17. These regulations compel exchanges to safeguard a minimum of 70 percent of customer crypto holdings in cold storage, a move to mitigate the risks of hacks and scams that have plagued the industry.

To gain recognition as legal trading entities, South Korean crypto marketplaces must forge partnerships with local banks to facilitate real-name bank accounts for their clientele. However, many local exchanges express reluctance, fearing potential exposure to financial malpractices like money laundering.

Close to 40 of an estimated 60 cryptocurrency operations are likely to cease, incapable of achieving stringent regulatory qualifications. The larger consequences will include the demise of around 42 so-called Kimchi coins, which are primarily listed on regional exchanges and predominantly traded in Korean won, as reported by Kim Hyoung-joong, a prominent professor at the head of Korea University’s Cryptocurrency Research Center.

The South Korean crypto trade is dominated by four major exchanges—Upbit, Bithumb, Korbit, and Coinone—which collectively handle over 90 percent of the nation’s crypto trading volume.

Bitcoin comprises a mere 10 percent of the crypto market, with the remaining 90 percent consisting of various other digital currencies. Lee Chul-yi, the head of mid-sized exchange Foblgate, anticipates a crisis akin to a bank run as the deadline approaches, leaving investors unable to liquidate their investments in ‘alt-coins’ that are exclusively traded on smaller exchanges. “They will be met with a sudden financial demise. The question remains whether the regulators can manage the ensuing complications,” he adds.

Approximately 20 exchanges equipped with the necessary security measures for personal data will persist, providing crypto-to-crypto trading services. The impact of the tightened market space is expected to be significant. “There are anticipated large losses for investors as trading is halted and assets are frozen across numerous smaller exchanges, where customer protection is unlikely to be a priority for those exchanges nearing shutdown,” warns Cho Yeon-haeng, president of Korea Finance Consumer Federation.

International exchanges that facilitate trading in South Korean won are also set to feel the repercussions. The FSC has issued formal notices to 27 foreign crypto exchanges catering to Korean investors.

Binance, the largest cryptocurrency exchange globally, has preemptively stopped its won-to-crypto trading services as part of its commitment to comply proactively with local regulations.

The regulatory revisions aim to temper the rampant speculation in cryptocurrencies in South Korea, which is contending with an economic slump, high unemployment rates, and surging property costs. Despite these challenges, a meaningful segment of the nation’s youth is pouring investments into the unpredictable market.

Bitcoin’s value has been marked by pronounced volatility, surging past $60,000 in April, then tumbling below $30,000 in June, and subsequently rebounding to an approximate $46,000, buoyed by the currency’s adoption as legal tender in certain countries.

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