South Korean regulators seems to strongly favor blockchain over cryptocurrencies, and some recent events have further proven this hypothesis. As a result, as much as 97% of local digital assets exchanges are in danger of extinction, local reports suggest.
Meanwhile, local politicians and regulators have started lobbying a new set of regulations, which could finally bring some clarity into this complex but crucial cryptocurrency market. So, how likely are they to succeed, and what are the main obstacles?
With the opening of Korean headquarters in Seoul, Cointelegraph looks deeper into the local regulatory landscape alongside Cointelegraph Korea’s chief editor, David Lee.
Midsized exchange’s closure revealed larger problems
Although South Korean exchanges are de jure permitted to trade Bitcoin (BTC) and other digital assets, most of those platforms seem to be in a fix, as the recent closure of a local crypto exchange called Prixbit revealed. When it shut down in early August, “due to negative internal and external influences,” as the owners put it, local press reported that excluding the country’s four largest players — Upbit, Bithumb, Coinone and Korbit, unofficially known as “the big four” — many small and midsized exchanges cannot open real-name virtual accounts for their users as a result of banks’ disinclination.
Indeed, while South Korean regulators introduced a real-name trading system for cryptocurrencies as part of Anti-Money Laundering (AML) efforts in January 2018, only the big four trading platforms have managed to establish corresponding relationships with local banks so far.
As per new regulations, domestic cryptocurrency markets are required to share users’ transaction data with banks, while traders themselves can only use bank accounts in their legal name that matches the name on their trading account.
Park Jong-baek, a partner at South Korean law firm BKL, told Cointelegraph, “Out of about six banks which set up such account system, only three decided to provide such account service to only big four exchanges.”
According to the lawyer, although other exchanges have been persistently asking banks to render that service for them too, all proposals were rejected based on the assumption that “transactions of cryptocurrencies even with real-name basis could be vulnerable to money laundering, terror or other illegal activities.”
That prompted those not considered to be in the big four of South Korean trading platforms to record transactions of individuals under the corporate, or “honeycomb,” accounts, according to Jun-heon Hwang, a market analyst at Seoul-based cryptocurrency firm BCSolution.
The law regarding virtual accounts leaves that loophole, Hwang told Cointelegraph, while local banks are reluctant to provide their services for smaller trading exchanges. According to the analyst, the dependance on honeycomb corporate accounts make those small and midsized players particularly vulnerable to hacking and other security-related incidents.
Non-big-four exchanges can indeed run fiat-involving transactions without real-name accounts through honeycomb bank accounts, Jong-baek confirmed to Cointelegraph. Those accounts could be opened up by certain banks mostly without disclosing their real purpose:
“Banks may or may not close such accounts in their discretion when they recognize the real purpose afterwards. In practice most banks have not terminated or closed such accounts even after their recognition only because they are used for cryptocurrencies unless they cause banks other concerns.”
A representative for Kdex, a top-10 crypto exchange in South Korea by trading volume, confirmed to Cointelegraph that it does not provide real-name virtual accounts despite attempting to register with local banks at least several times. Although Kdex has established “a real name certification” after collaborating with a third-party company, the spokesperson added, having the actual sanctioned system in place would have made deposit and withdrawal procedures considerably easier.
However, some South Korean exchanges have managed to take advantage of this complex situation. A representative for Gopax, another major domestic trading provider that is currently locked out of the real-name virtual accounts system, informed Cointelegraph:
“Ironically, the lack of virtual accounts has helped in a roundabout way: the lack of such accounts allows GOPAX users to use whichever bank account they currently use for deposit and withdrawal purposes. In contrast, exchanges with virtual accounts require the user to have an account at a specific commercial bank to use them; as such, the lack of virtual accounts has served to increase the ease of use for GOPAX.”
Still, the exchange’s spokesperson added that it is “currently in discussion with several of the largest commercial banks in Korea” regarding the issuance of virtual real-name accounts, which confirms the feature’s importance for South Korean cryptocurrency exchanges.
Another alleged factor for the poor performance of domestic cryptocurrency exchanges is low trading volume. Albeit data from crypto analytics website Coinhills shows that the South Korean won is currently ranked the third-most traded national currency for BTC, Business Korea reports a much grimer picture. According to the publication, “only five or six” South Korean exchanges rank among the top 100 in the world by transaction volume, which indeed seems to correlate with current data obtained from CoinMarketCap.
“It is no exaggeration to say that 97 percent of domestic exchanges are in danger of going bankrupt due to their low volume of transactions,” the article concluded. However, it is difficult to confirm that information: There is no official data on the South Korean market, because the opening of a crypto exchange in the country doesn’t require obtaining any registration, license or permit.
Local regulations toughened circa 2017–2018
Back in 2017, times were different (arguably more favorable) for the local crypto players. In July that year, the government recognized Bitcoin as a legal payment method, allowing fintech companies to process up to $20,000 worth of South Korean won in BTC for their clients. As a result, domestic exchange platforms were moved under the purview of the country’s top financial regulator, the Financial Services Commission (FSC). The watchdog required capital of at least $436,000 to be retained, plus additional data for Know Your Customer (KYC) and AML purposes.
At the time, local exchanges processed over 14% of global Bitcoin trades, being the third-largest market after the U.S. and Japan. The situation took a different turn in September, when the FSC suddenly rolled out a Chinese-like blanket ban on initial coin offerings (ICOs), triggering observable sell-offs in the market. The agency explained the move with the lack of stability and rising risks of financials scams at the time.
Then, in late 2017, the South Korean market found itself at the epicenter of ongoing crypto mania. When Bitcoin’s price famously soared from $5,000 to $20,000, it briefly traded for as much as $25,000 on local exchanges. The premium rates were dubbed the Kimchi Premium, and effectively triggered the government to step in with rigid regulations in a bid to poise the market.
Thus, in January 2018, the FSC banned anonymous trading on local exchanges, additionally locking out foreigners and minors. The agency followed the innovation with a series of on-site inspections of local banks providing services to cryptocurrency exchanges and fines totaling 141 million won ($130,000) billed to a number of local trading platforms that ostensibly provided insufficient user data protection.
As soon as February, first blood was spilled: Coinpia, one of the exchanges that had been fined by the FSC for poor user data protection, went offline after failing to comply with the new KYC requirements. Eventually, other domestic exchanges, such as Coinnest, closed shop.
In April 2018, the Korean Blockchain Association (KBA) — an alliance comprised of 14 crypto trading platforms, including Bithumb, Upbit and OKCoin — published a self-regulatory framework for its members to boost trading transparency. It contained five key requirements, including managing clients’ coins separately from their own, holding a minimum equity of 2 billion won ($1.8 million),and publishing regular audit and finance reports.
In January 2019, despite the National Assembly debating the ICO ban, the watchdog officially announced that the restriction would stay in place as the FSC announced. A week later, South Korea’s central bank issued a warning over central bank digital currencies, or CBDCs, further cementing the government’s overall cold attitude toward cryptocurrencies.
Blockchain as the new direction for South Korea
Notably, South Korean regulators have been much more welcoming toward the technology underpinning crypto. In June 2018, the country’s Ministry of Science and ICT announced an extensive Blockchain Technology Development Strategy that aims to raise 230 billion won (approximately $207 million) by 2022.
The new initiative is expected to foster 10,000 blockchain industry professionals and 100 companies in areas including real estate, online voting, shipping logistics, real estate and international e-document distribution, among other things.
Closer to the end of that year, South Korea’s government announced it will spend 4 billion won (about $3.5 million) to set up a blockchain-enabled virtual power plant in Busan. In July 2019, Busan even decided to launch a local cryptocurrency to revive the local economy, secure a leading position in blockchain development and hence further strengthen its position as the preferred bidder for South Korea’s blockchain regulation-free zone.
As a part of the potential designation, Busan is reportedly going to promote blockchain in multiple industries, as well as to provide a basis for cryptos, including ICOs in particular. Its main competitor for the role, Jeju Island, has recently announced the Blockchain Hub City Development Research Service. Future strategy director of Jeju Island Noh Hee-seop said of the development that he expects Jeju to become a blockchain hub and contribute to the Fourth Industrial Revolution.
Furthermore, this summer, President Moon Jae-in announced that regulatory innovation regarding blockchain technology is now a question of survival for the nation. Specifically, Moon declared:
«While regulatory innovation in the era of industrialization was a matter of choice, it is now a question of survival as we are experiencing the fourth industrial revolution, characterized by fusions across industries and fields.”
The largest national business players are actively looking into blockchain, too. Both electronics giants Samsung and LG are reportedly working on blockchain-focused smartphones, domestic financial institutions are incorporating the technology for their services, local mobile carriers are announcing large scale blockchain projects.
However, the “Bitcoin before blockchain”-like agenda has had its consequences on the local market: Namely, South Korean internet giant Kakao, which has over 50 million global users, is reportedly having problems listing its Klay cryptocurrency on local exchanges due to the ICO ban.
According to recent reports from local press, Kakao is not the only local player having such troubles. Apparently, South Korean blockchain projects have been “flocking” to foreign exchanges over the past months. So, will the situation change in the future? Some recent developments suggest that it could be the case.
In March 2019, congressman Kim Byung-wook of the ruling Minjoo Party proposed a set of cryptocurrency regulations known as the “Amendment to the Law on the Reporting and Use of Specific Financial Transaction Information,” breaking the established silence of South Korean regulators.
Notably, the amendment defines cryptocurrencies as virtual assets, and subordinates cryptocurrency exchanges to the Financial Intelligence Unit, an agency controlled by the FSC. It also introduces a licensing system for cryptocurrency exchanges and is largely influenced by regulations outlined by the Financial Action Task Force (FATF), an AML intergovernmental organization. If the amendment comes into power, it will replace the aforementioned guidelines established by the FSC in January 2018.
The amendment was expected to pass the National Assembly before July 9 and hence invalidate previous FSC guidelines, but it failed to be enacted. As Shin Ha-young, the secretary of the amendment’s author, told Cointelegraph that the bill fell flat because the National Assembly’s Policy Committee “found no time” to publically review it before voting.
“Under the current situation, it is not clear when it will be legislated,” Shin added. Meanwhile, local experts believe that the amendment might come into power by June 2020, when FATF guidelines for international regulation of cryptocurrencies are applied to 37 FATF member countries.
A big-four exchange official who requested to remain anonymous told Cointelegraph that it supports the amendment because “even FATF-oriented guideline is better than nothing.” However, the bill most likely won’t be passed in the near future, the source added.
Later in August, the Seoul Central District Court accepted the injunction filed by local cryptocurrency exchanges Coinz, BitSonic and Ventasbeat against banks that suspended their honeycomb accounts. As a result, the use of business accounts by domestic trading platforms can officially be recognized as legal.
«There is a real situation in which Crypto exchanges have a clear intention to use a real name verification deposit account service, but have have not even given a chance to receive it,» the court said.
Meanwhile, OKex, another exchange that has recently launched a self-regulated organization, or SRO, aiming to standardize crypto exchange compliance practices and policies across the world, has already started following FATF guidelines amid the general regulatory uncertainty in South Korea. In September, the local arm of trading platform delisted five major privacy-focused altcoins, citing new guidelines issued by the international regulator.
“We are committed to providing a credible and trustable platform for traders, and we do respect local regulators,” Andy Cheung, head of operations of OKEx, told Cointelegraph of the move, adding:
“We support curbing crypto-related crimes but at the same time the industry needs its space to grow and develop, hence putting it under a microscope might not be the best thing for the industry.”