S. Korea’s Crypto Rules Might Only Help the ‘Big 4’ Exchanges

As U.S. Treasury Secretary Janet Yellen, the Central Bank of Nigeria and India’s Parliament have demonstrated, governments and regulators round the world are cautious about the rise of cryptocurrency. South Korean authorities aren’t any exception. Lee Ju-yeol, the governor of the Bank of Korea, mentioned earlier than a parliamentary committee final month that bitcoinhas no intrinsic value” and that he “doesn’t perceive why the worth is so excessive.”

While the Korean authorities doesn’t appear bent on banning crypto, it’s actually intent on regulating it. The impact could also be monopolization by South Korea’s largest exchanges at the expense of smaller opponents. 

One crucial piece of laws is known as the “Act on Reporting and Using Specified Financial Transaction Information,” aka the Financial Transaction Reports Act (FTRA), which requires digital asset service suppliers to register with monetary authorities and adjust to anti-money laundering (AML) rules. The FTRA was amended to limit crypto buying and selling in March of final yr, nevertheless it solely went into impact on March 25, 2021. It’s crucial as a result of it causes all kinds of bureaucratic and administrative issues for crypto exchanges that want to enter the market or just survive.

Starting March 25, all cryptocurrency exchanges are required to register with the Financial Intelligence Unit (FIU) of the Financial Services Commission (FSC). The FIU will then file the registration with the FSC, which should approve the registration earlier than it turns into official. So whereas the authorities is packaging it as a “registration course of,” the FSC is definitely turning into the unofficial state licensor of the Korean crypto business.

Until the FTRA was amended by the National Assembly, South Korea had no particular authorized language to outline or describe crypto buying and selling. Cryptocurrency wasn’t (and nonetheless isn’t) formally acknowledged as a monetary asset, so there was no strategy to regulate it as such. Pretty a lot anybody who wished to might arrange an alternate and was not required to register with any authorities.

The FTRA is South Korea’s nod to the Paris-based Financial Action Task Force (FATF). It’s principally Seoul’s manner of telling the world, “We adjust to the FATF’s AML tips.” Legislators now outline cryptocurrencies as “digital belongings” and crypto exchanges as “digital asset service suppliers.” A VASP has been outlined as any enterprise that facilitates gross sales, purchases, exchanges and transfers of crypto that contain fiat. This consists of exchanges, custodies and brokers. Interestingly sufficient, peer-to-peer (P2P) platforms and crypto consultants (individuals who simply present data) don’t qualify as VASPs, largely as a result of they don’t deal immediately with fiat. 

That’s the key phrase: fiat. So lengthy as a Korean’s bitcoin or ether or dogecoin is rarely transformed to Korean gained, the authorities doesn’t appear to care about it. Until we see the day when folks really use crypto as an on a regular basis type of fee to the level that it rivals or supplants money, the authorities in all probability gained’t attempt to tax crypto in its native type.

Officially, the authorities’s issues about crypto are rooted in cash laundering or “defending” customers.

But maybe what’s actually grabbed the authorities’ consideration is the explosive improve in crypto buying and selling quantity over the previous few years. The nation’s crypto commerce is dominated by 4 main exchanges: Bithumb, Upbit, Korbit and Coinone. (I’ll now refer to those as the Big 4.) In simply January and February of this yr, the Big 4 noticed 445 trillion won (US$391.7 billion) in trading volume. For some context, their cumulative buying and selling quantity for the whole yr of 2019 was 488 trillion gained ($394.3 billion). The Big 4’s every day buying and selling quantity for these two months averaged at 8 trillion gained ($7 billion), practically a fourfold improve from the similar interval in 2017. 

More sophisticated than it appears 

Some of you might be pondering: OK, exchanges must register with authorities. So what? Just register and in case you’re legit you’ll get authorised. As lengthy as you’re not doing something shady you shouldn’t have something to fret about, proper? 

In concept, sure. In follow, almost certainly not.

There are sure circumstances an alternate should meet as a way to have its registration “authorised” by the FSC. By far the most vital of those circumstances is the have to type partnerships with native business banks.

Before the FTRA modification, customers on crypto platforms might register underneath varied consumer names and deposit money into an organization checking account to buy intra-platform credit that might be used to buy crypto. These firm accounts are known as “hive accounts” as a result of a single account homes a number of customers. While an intensive investigation would finally reveal who deposited how a lot from which account, a hive account makes it far more troublesome to maintain observe of who’s who.  

The FTRA replace, nonetheless, requires customers to register underneath their actual names and hyperlink their private financial institution accounts. In different phrases, goodbye hive accounts. This necessitates partnerships with business banks, that means the new laws provides banks the final authority to find out which exchanges survive. Some crypto purists gained’t be blissful about this as a result of it primarily negates one in every of the foundational ideas behind crypto: freedom from conventional monetary establishments.

But in South Korea, banks have the authority to find out whether or not or not a VASP meets AML requirements. Every financial institution has its personal standards, which aren’t made public, however there are two common circumstances: VASPs should differentiate between native belongings and buyer deposits, and so they should have their data safety administration programs (ISMS) licensed by the Korea Internet and Security Agency (KISA). ISMS certification has confirmed to be time-consuming and expensive. It normally entails a hefty consulting invoice and costly {hardware}. While this might not be an issue for the Big 4, it might be a barrier to smaller and mid-sized exchanges and startups.

But right here’s the kicker: The Big 4 have already got partnerships with business banks, which have been reluctant to companion with smaller exchanges. Banks are naturally conservative and averse to danger, so they have an inclination to favor main gamers over the little guys.

So if an alternate needs to grow to be legit, it wants a financial institution partnership. Because banks have the final say in who will get these partnerships, they’ve the final say through which exchanges survive.

“Crypto startups that aren’t on a serious company scale may have a tough time getting their ISMS licensed, buying financial institution partnerships and assembly different circumstances for VASP registration,” mentioned Ku Tae-eon, an legal professional with the strategic consulting agency Tek & Law, at a convention co-hosted by CoinDesk Korea in November. Ku argued that the revised FTRA will shrink the nation’s crypto business. He has known as for separate laws particular to crypto.

But even the Big 4 appear on edge. Bithumb, the greatest of the 4, just lately started delisting dark coins in what seems like a marketing campaign to look extra “legit.” Trading for 3 darkish cash (cryptocurrencies that supply better anonymity) on Bithumb ceased on March 24, a day earlier than VASP registration started. Coincidence? Probably not.

The registration deadline is Sept. 24. Any VASP that fails to register or has its registration denied will probably be shut down. Sure, it might proceed working as a P2P platform, however the majority of Korean merchants will probably flock to the Big 4 for the similar motive most individuals look to Google for searches even when there are different choices: it’s simply extra handy. Plus, the common Korean investor (particularly newcomers) will almost certainly need to use fiat for his or her crypto purchases.

Naturally, business insiders are predicting the Big 4 (out of an estimated 200) will finally be the solely crypto exchanges with fiat on-ramps. CoinDesk Korea’s Park Geun-mo and Kim Dong-hwan cautiously predict that possibly one or two might be added to the record at most. “Until September rolls round there’s no strategy to inform what is going to really occur, nevertheless it doesn’t look good for the smaller exchanges,” Park informed me.

Once their hive accounts are stripped away, smaller exchanges will battle to outlive as a result of it’s just about inconceivable for them to safe partnerships with banks. Banks will in all probability deem their AML programs unfit. As banks finally bear accountability if any funds are used for cash laundering or terrorism financing, there’s no motive for them to danger partnering with a smaller alternate.

Survival of the coziest

The backside line is that after Sept. 24, it’s going to grow to be that a lot tougher for an outsider to construct up the specs to compete in opposition to the Big 4 and even qualify as a registered VASP. Furthermore, any up-and-coming cryptocurrency that seeks to have a major impression on the Korean market should get listed on the Big 4. There have been reviews of Busan Bank holding talks with 5 different exchanges about potential partnerships, however issues are nonetheless up in the air. A supply at Busan Bank has made it clear to CoinDesk Korea that “contemplating partnerships and making them really occur are completely separate issues.”

While Busan Bank is a regional financial institution and isn’t as large as nationwide names like Shinhan or Woori, it’s nonetheless a business financial institution that will assist legitimize an up-and-coming alternate. 

On March 16, the FSC issued a “warning” to crypto merchants to “examine the registration standing” of exchanges and to “decide whether or not an alternate will probably be sustainable in the long run” earlier than creating an account and utilizing the platform. This is being learn as a de facto declaration {that a} vital variety of exchanges will probably be shut down. It could as nicely learn: “Don’t hassle buying and selling crypto until it’s on the Big 4.”

As if a sign of issues to return, OKEx Korea just lately introduced it should shut operations subsequent month, citing unsatisfactory earnings and the issue of forming a financial institution partnership.

Funny sufficient, Korea’s crypto ecosystem might find yourself mirroring South Korea’s total financial system, the place a small variety of conglomerates comprise a majority of financial productiveness. According to the Korea CXO Institute, 64 chaebols (family-owned conglomerates) comprised 84% of the nation’s GDP however solely 10% of jobs in 2019.  

Of course, there’s a silver lining. The common investor will definitely profit from crypto turning into institutionalized and going mainstream. Services on the Big 4 will in all probability get far more handy and extra accessible as time goes on. But a lot as how I can principally select between LG or Samsung when shopping for a fridge, common Korean retail buyers will almost certainly be buying and selling their crypto on the Big 4.

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About the Author: Daniel