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Deep Dive: Cryptocurrencies

Growing pains: Korea’s smaller crypto exchanges face shutdown

The move to bring virtual assets under control is exacting, but will create a safer system for investors, analysts say

By Aug 05, 2021 (Gmt+09:00)

Korea is set to crack down on virtual assets
Korea is set to crack down on virtual assets

In mid-July, a small obscure South Korean cryptocurrency exchange posted a notice on its website at midnight, saying it is suspending trading of 57 coins, citing the possibility of price manipulation.

The exchange, ChainX, asked cryptocurrency investors to withdraw all their deposits over the next month – a move widely seen as a step before closing down the digital platform for good.

ChainX is among dozens, probably close to a hundred, of smaller crypto exchanges in the country facing business shutdowns as the financial regulator tightens rules to prevent criminal activity and protect investors.

By Sept. 24, such virtual asset trading bourses must be certified by the state in terms of risk management and partner with a domestic bank to ensure real-name client accounts if they want to continue operations.

The Financial Services Commission (FSC), the regulator, said any cryptocurrency exchange operator in the country that fails to meet the requirements will be deemed to be operating illegally and face up to five years in prison or a fine of 50 million won ($43,500).

Overseas crypto exchanges that serve Koreans with won-currency settlements are also subject to the new regulations to continue dealings with Korean investors.

The tightened rules, industry officials say, could result in smaller local exchanges delisting hundreds of altcoins – cryptocurrencies other than bitcoin – from their platforms. In the worst-case scenario, they will end up being closed down completely.

“Come Sept. 24, we’ll see a large number of minor cryptocurrency exchanges shut their businesses,” an official at a major Korean crypto exchange told The KED Global, the English news outlet of The Korea Economic Daily.

“Local banks are reluctant to tie up with exchange operators having questionable credit. The country’s big four crypto exchanges also feel uneasy about this.”

Bitcoin
Bitcoin

REINING IN CRYPTO FRENZY

As virtual assets become popular, crypto exchanges have sprung up globally, coming under scrutiny by regulators to ward against the new asset class emerging as a haven for money laundering and financial crimes.

Korean regulators said they are particularly concerned about young people who see virtual assets as a quick path to prosperity amid persistently high unemployment and skyrocketing home prices.

However, the value of bitcoin, one of the world’s most favorite virtual assets, has fallen by more than half to 35.3 million won on July 20 from 81.6 million won just three months earlier. Other altcoins also saw a similar downward trajectory given doubt over their intrinsic value and tighter regulations.

In March, South Korea passed new legislation with a six-month grace period to strengthen the supervision of virtual assets.

Under the new law, all virtual asset management firms, including crypto exchanges, must register with the Korea Financial Intelligence Unit (KFIU) to operate in the country.

In order to register, exchanges are required to be certified by the Information Security Management System (ISMS) and partner with a domestic bank to ensure their customers have real-name bank accounts.

Bithumb, one of South Korea's largest cryptocurrency exchanges
Bithumb, one of South Korea's largest cryptocurrency exchanges

OPPOSITION TO THE MOVE

But local banks have been reluctant to partner with crypto exchanges as the banks would be responsible for any fraudulent transactions.

They have asked the government to relieve them of liability for money laundering or other financial crimes on crypto exchanges. The FSC has rejected their requests.

Currently, only the four biggest crypto exchanges – UPbit, Bithumb, Coinone and Korbit – have real-name bank accounts issued by commercial banks.

The reluctance of banks to partner with smaller exchanges means that all but a few Korean cryptocurrency exchanges could be forced out of business, analysts said.

“Our contract with a main local bank ends on Sept. 24. We have no idea what will happen after that,” said an official at one of the big four exchanges.

As of mid-July, about 6.56 million investors were registered with the four exchanges, with transactions valued at an estimated 6.08 trillion won ($5.3 billion).

South Korea accounts for about 10% of global cryptocurrency transactions, according to industry data. The intensity of trading has seen cryptocurrencies such as bitcoin trade at a much higher rate, called the Kimchi Premium, in Korea.

DIGITAL ASSET CUSTODY

Korean banks have come under criticism as they are actively entering the digital asset custody service (DACS) market to enjoy the crypto boom while keeping a distance from crypto exchange operators.

In early July, Woori Financial Group said it is setting up a digital asset custody joint venture with bitcoin-based fintech solutions provider Coinplug Inc., following similar moves by other lenders such as KB Financial Group and Shinhan Financial Group.

Digital asset custody is a service that safely stores and manages digital assets, including cryptocurrencies, owned by various entities and organizations.

Various cryptocurrencies
Various cryptocurrencies

GROWING PAINS

South Korea is not alone in tightening regulations on virtual assets.

China has banned the use of cryptocurrency for transactions and is cracking down on mining operations.

Japan, Germany and the UK have all halted the activities of or issued warnings about Binance, one of the world’s largest cryptocurrency exchanges.

The US is calling for tighter regulations on virtual assets and requires that transfers of $10,000 or more in crypto assets be reported to the Internal Revenue Service (IRS).

Analysts said there are too many altcoins in Korea and it’s good that exchanges are voluntarily removing transactions of dubious cryptocurrencies, although the domestic market is still relatively small.

“The government’s efforts to bring crypto exchanges into the mainstream regulatory infrastructure will be challenging. The end result, however, will be a more transparent system that is safer for investors,” said a senior official at a local leading exchange operator.

“Korea is now suffering growing pains.”

Write to In-Soo Nam at isnam@hankyung.com

Edited by Jennifer Nicholson-Breen

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