South Korea’s small crypto exchanges face increasing regulatory heat

Authorities in South Korea are persevering with to suggest and enact measures geared toward sustaining strict oversight over the nation’s crypto alternate market. These come amid a big uptick in cryptocurrency buying and selling quantity, particularly for altcoins.

In May, South Korea’s Financial Services Commission (FSC) announced that the federal government is planning to implement stricter regulatory insurance policies on cryptocurrencies usually. This transfer comes as digital asset service suppliers (VASPs) have been given till September to register with the suitable state authorities.

Crypto exchanges in South Korea have been already beneath stress even earlier than this new set of stricter regulatory insurance policies. The requirement for real-name buying and selling accounts has seen smaller- and medium-sized exchanges scramble to safe licenses from business banks to no avail, no less than as of the time of writing.

Recently, reviews have emerged of one other coverage transfer from South Korean authorities that might have far-reaching ramifications, even for the “Big Four” crypto exchanges within the nation — Bithumb, Coinone, Korbit and Upbit.

FSC shines highlight on cross buying and selling observe

As beforehand reported by Cointelegraph, the FSC is planning to ban cross trading on crypto exchanges within the nation as a part of a raft of stricter regulatory measures for buying and selling platforms. Cross buying and selling is a technique utilized by buying and selling desks to offset purchase and promote orders for a similar asset with out recording the transactions on their order e-book.

Cross buying and selling, whereas unlawful in lots of international locations, is in some methods a obligatory observe for crypto exchanges in South Korea. For one, crypto buying and selling within the nation is denominated in Korean gained, however charges are collected in cryptocurrencies.

Cross buying and selling provides an answer for South Korean crypto exchanges, permitting them to transform buying and selling charges to Korean gained by performing the conversion proper on their platform. With the FSC banning the observe, these exchanges could now have a tough time realizing the numerous income stream that comes from accumulating buying and selling charges.

Indeed, the preliminary responses from some business commentators to the deliberate transfer are {that a} cross buying and selling ban would function a income chokepoint for South Korean crypto exchanges. The FSC’s ban, if handed, would imply necessary zero-commission buying and selling by platforms within the nation.

South Korean crypto exchanges cost 0.05% on common as buying and selling charges. This signifies that within the first quarter of 2021, Upbit raked in nearly $9 million in charges each day from a 24-hour turnover of about $17.9 billion. Indeed, the sizable surge in South Korea’s crypto buying and selling quantity in 2021 has meant better price income for platforms.

As early as February, Bitcoin (BTC) turnover for each Bithumb and Upbit was already upward of 11 occasions greater than the figures recorded for a similar interval in 2020. Earlier in June, Cointelegraph reported that checking account flows for exchanges within the nation have been up 40% over the past year.

The income development for South Korean crypto exchanges has even had a trickle-down impact on banking companions and buyers. Upbit’s major banker, Ok Bank, loved a sharp turnaround in its financial performance and is reportedly concentrating on 2022 for an preliminary public providing.

While Bitcoin fever characterised the early crypto buying and selling mania of 2021, the pattern pivoted to altcoins because the yr progressed. With token costs surging parabolically up till May, South Korean crypto merchants seemed to favor smaller-cap altcoins.

Such was the extent of the altcoin buying and selling mania that the Korea Federation of Banks warned of the trend’s potential risks. At the time, the order books of even the Big Four confirmed BTC buying and selling exercise accounting for lower than 5% of their 24-hour buying and selling exercise, which was considerably decrease than the worldwide common for Bitcoin on different platforms.

None of our enterprise, says the FSC

As is commonly the case with regulatory measures in South Korea, the smaller exchanges would possibly face considerably better working difficulties if the FSC’s cross buying and selling ban turns into legislation. Assuming that platforms might be loath to forgo the income from buying and selling charges, South Korea’s cryptocurrency exchanges must provide you with another.

The most possible various could be to create a separate buying and selling desk devoted to changing crypto buying and selling charges to Korean gained. However, any new crypto trading-related enterprise in South Korea have to be registered with FSC’s Financial Intelligence Unit and cling to strict Anti-Money Laundering (AML) legal guidelines.

This registration comes with a big value burden that may be an excessive amount of for the smaller platforms nonetheless struggling to satisfy the September licensing deadline. Another potential choice for exchanges could be to accomplice with mortgage suppliers open to accepting crypto as collateral.

Related: South Koreans flock to crypto amid a heavy-handed regulation approach

Regardless of the route chosen, exchanges can in poor health afford to keep away from developing with an answer to the issue if cross buying and selling is banned by the FSC. Apart from the apparent income implications, crypto buying and selling charges additionally entice withholding tax levies.

For the FSC, this explicit drawback is one the exchanges must remedy by themselves. Supporting its determination to pursue a cross buying and selling ban, the fee acknowledged that permitting alternate operators to commerce towards their clients constitutes a battle of curiosity with important worth manipulation dangers.

As to the problem of discovering various technique of repatriating buying and selling charges to Korean gained, the FSC stated: “Whether you want to change cryptocurrency to another asset (other than won) or to keep cryptocurrency, you need to find a solution yourself.”

Is this it for smaller exchanges?

Responding to Cointelegraph’s request for feedback, a foreign-media relations spokesperson for the FSC acknowledged:

“As the authorities are currently working on amendments to the relevant law, it would be inappropriate to comment on your questions right now with specific measures still being drawn up. When specific measures are ready for announcement, we will put them up on our website.”

For Lee Chul-ie, CEO of South Korean cryptocurrency alternate platform Foblgate, the proposed cross buying and selling ban is solely one other blow for smaller exchanges within the nation. Speaking to the Financial Times, Chul-ie remarked: “We are facing an existential crisis. We want to legitimise our business but banks are reluctant to offer us real-name accounts.”

According to the alternate operator, further issues like cross buying and selling bans may push smaller platforms outdoors the nation or to hunt “grey areas” to avoid stringent regulatory measures.

However, Jeff Kang, South Korea nation supervisor at blockchain safety outfit CoolBitX, is of the opinion that some smaller exchanges will be capable of handle the scenario. In a dialog with Cointelegraph, Kang opined:

“While it appears that increased oversight from the South Korea FSC might be daunting news for the local cryptocurrency industry, the situation is not as dire as it seems. The Korean government’s stance on cryptocurrencies is not to totally stamp out its use, but to account for consumer protection and to eradicate financial terrorism and money laundering.”

According to Kang, the FSC’s purpose is to not power exchanges overseas however to make sure strong AML compliance protocols, including: “In light of this, cryptocurrency exchanges will have to signal their committed stance to double down on compliance efforts in order to achieve licenses by the September deadline.”

Kang additionally stated that as many as six different exchanges are near receiving real-name buying and selling account licenses, to carry the full quantity to 10. However, even when that occurs, there’ll nonetheless be over 50 exchanges in South Korea with unsure regulatory standing that may in all probability be pressured to close down their operations come the September deadline.

For banks, their reticence in coping with exchanges comes from the truth that monetary establishments in South Korea may be held chargeable for the misdeeds of their cryptocurrency alternate companions.

This scenario may be due for a change, with discussions underway between banks and the FSC to restrict the legal responsibility of economic banks within the occasion of any misdeeds dedicated by their crypto alternate purchasers. These discussions are additionally half of a bigger agenda that may see banks classify crypto exchanges as high-risk clients.