A regulatory overhaul by the Financial Service Commission of South Korea to curb the cryptocurrency surge in the country will see nearly two-thirds of the country’s crypto exchanges shut down, resulting in a loss of losses of more than Won3tn ($2.6 billion).
South Korea is one of the biggest cryptocurrency markets in the world, accounting for about 5 per cent of the global trading in cryptos. The Korean won is the third most widely used currency for bitcoin trading, after the dollar and euro.
The FSC regulator has set a September 24 deadline for foreign and local exchanges to register as legal trading platforms or face cuts under the country’s Information Security Management System (ISMS). The country is also reportedly considering banning cross-trading. This comes after Korean crypto regulators introduced new AML measures that came into effect on 25 March 2021.
Bitcoin experienced surging to more than $60,000 in April.
The FSC has warned all the trading exchanges unable to comply with the rules to warn their customers of the imminent closure by September 17. The new measures require the exchanges to hold at least 70 per cent of their customers’ crypto deposits in cold storage in order to counter systemic hacks and scams in recent years.
South Korean crypto exchanges must partner with local banks to open real-name bank accounts for customers to be licensed as a legal trading platform. But the local exchanges are resisting the move over fears of being exposed to money laundering and other financial crimes.
Nearly 40 of the 60 estimated cryptocurrency operators will shut down as they will be unable to meet the strict regulatory standards to qualify as legal exchanges. This massive shutdown will also cut down the 42 so-called Kimchi coins, alternative digital currencies that are listed on local exchanges and traded mostly in Korean won, according to Kim Hyoung-joong, a professor and head of the Cryptocurrency Research Center at Korea University.
Four big exchanges dominate South Korea’s crypto trading — Upbit, Bithumb, Korbit and Coinone — which account for more than 90 per cent of the country’s total trading volume.
Bitcoins make up just 10 percent of the circulating cryptos, the rest 90 percent are other digital coins. “A situation similar to a bank run is expected near the deadline as investors can’t cash out of their holdings of ‘alt-coins’ listed only on small exchanges,” said Lee Chul-yi, head of Foblgate, a mid-sized exchange. “They will find themselves suddenly poor. I wonder if regulators can handle the side-effects.”
Only about 20 exchanges that have the required security systems for personal information will be allowed to offer crypto-to-crypto trading services. The limited market space is bound to affect the operators. “Huge investor losses are expected with trading suspended and assets frozen at many small exchanges as customer protection will not likely be the priority of those exchanges facing an imminent closure,” said Cho Yeon-haeng, president of Korea Finance Consumer Federation.
Global exchanges offering trading in South Korean currency of won will be affected too. The FSC has already sent notices to 27 foreign crypto exchanges that run operations for Korean traders.
Binance, the world’s biggest crypto exchange, has taken the lead in suspending its won-to-crypto trading service in order to “proactively comply with local regulations.”
The country’s regulators hope the overhaul will dampen the fervor surrounding the cryptocurrencies in South Korea. South Korea is facing an economic downturn with high unemployment and surging housing prices, but most young citizens are investing in the volatile currency.
Bitcoin has experienced extreme volatility, surging to more than $60,000 in April before plummeting to less than $30,000 in June. It has since rebounded to about $46,000, driven by news of adoption of the digital currency as legal tender in some countries.
