Korean banks enter digital asset custody market in quick succession

Woori Financial Group has become South Korea’s third major banking group to enter the digital asset custody service (DACS) market, following KB Financial Group and Shinhan Financial Group.

According to the banking industry on July 11, the financial group’s banking unit Woori Bank has agreed to set up a digital asset custody joint venture (JV) with bitcoin-based fintech solutions provider Coinplug Inc.

Coinplug will be the largest shareholder of the JV, named D-Custody, while Woori Bank will be the second major shareholder. Sources said that the JV will be incorporated by next week at the earliest.

Digital asset custody is a service that safely stores and manages digital assets, including cryptocurrency, owned by various entities and organizations. Demand for the service has been growing lately, with a much higher number of Korean firms starting to own various types of cryptocurrencies for business diversification or investment purposes.

South Korea’s largest bank KB Kookmin Bank entered the DACS market by establishing Korea Digital Asset Co. (KODA) last November with domestic blockchain company Haechi Labs and blockchain-oriented venture fund Hashed.

Similarly, Shinhan Bank joined the scene earlier this year by becoming a strategic investor of Korea Digital Asset Custody Co. (KDAC), another DACS company founded by the digital asset exchange Korbit.

Another major bank, NH Bank, on July 8 announced plans to kick off its digital asset business together with Korea Information & Communications Co. and Hexlant Inc., a blockchain startup that develops digital wallet technologies.

CURRENT REGULATIONS IN KOREA

Korea currently doesn’t allow domestic entities to use services provided by cryptocurrency exchanges. Thus, the companies and organizations in Korea must keep their cryptocurrencies in their own storage drives such as USBs, meaning a high risk of theft or loss.

In such a regulatory environment, digital asset-owning organizations have been calling for an expansion of digital asset custody services.

While these organizations would ideally want the country’s banks to keep their digital assets, as banks have traditionally been highly reliable custodians, Korea’s current laws also forbid the banks from directly entering the DACS market. That’s why the Korean banks are setting up DACS JVs with only partial ownership.

“In overseas markets, the digital asset custody has become a successful, established practice among the new services offered by the banks,” said an official of Woori Bank.

Unlike in Korea, the banks in Japan and Switzerland have been offering DACSs directly to the organizations in demand. The US financial regulators last year also officially allowed the financial sector to provide DACS services.

Korea’s banking experts highlight that the DACS market is essentially a low-risk business that can provide another stable revenue stream for the banks.

They highlight that unlike cryptocurrency trading, which the country’s major banks have shied away from given high financial risk surrounding the unpredictability, the DACS model works in a way similar to that of the traditional banking sector.

“The digital asset custody contracts must abide by the same customer identification and anti-money laundering systems currently run by the banks. Unlike the cryptocurrency trading business that has a high level of uncertainty, the banks understand that the digital asset custody business can be largely under their control and also falls under their area of expertise,” said KODA COO Cho Jin-seok.

Write to Nan-sae Bin at binthere@hankyung.com
Daniel Cho edited this article.