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South Korean authorities continue to propose and adopt measures to maintain strict surveillance of the country’s crypto exchange market. These come amid a significant increase in the volume of cryptocurrency trading, especially for altcoins.
In May, the Financial Services Commission of South Korea (FSC) announced that the government planned to enforce stricter regulatory policies on cryptocurrencies in general. The move comes as virtual asset service providers (VASPs) have until September to register with the relevant state authorities.
Crypto exchanges in South Korea were already under pressure even before this new set of stricter regulatory policies. The requirement for real-name trading accounts has seen small and medium-sized exchanges scramble to obtain licenses from commercial banks to no avail, at least at the time of writing.
Recently, there were reports of yet another policy move by South Korean authorities that could have far-reaching ramifications even for Big Four crypto exchanges in the country Bithumb, Coinone, Korbit and Upbit.
FSC shines the spotlight on cross trading practices
As previously reported by Cointelegraph, the FSC plans to ban cross-trades on crypto exchanges in the country as part of a series of stricter regulatory measures for trading platforms. Cross trading is a method used by trading desks to clear buy and sell orders for the same asset without recording the transactions in their order book.
Cross-trading, while illegal in many countries, is in some ways a necessary practice for crypto exchanges in South Korea. On the one hand, crypto trading in the country is denominated in Korean won, but the fees are collected in cryptocurrencies.
Cross trading offers a solution for South Korean crypto exchanges, allowing them to convert trading fees into Korean won by doing the conversion directly on their platform. With the FSC outlawing this practice, these exchanges may now struggle to realize the large revenue stream that comes from collecting trading fees.
Indeed, the first responses from some industry commentators to the planned move are that a cross-trade ban would serve as a revenue bottleneck for South Korean crypto exchanges. The ban on FSCs, if passed, would mean mandatory, commission-free trading by platforms nationwide.
South Korean crypto exchanges charge an average of 0.05% as a trading fee. This means that in the first quarter of 2021, Upbit raked in nearly $ 9 million in fees per day for 24-hour revenue of around $ 17.9 billion. This is because the sharp increase in the volume of crypto exchanges in South Korea in 2021 has resulted in an increase in fee income for the platforms.
As of February, Bitcoin (BTC) turnover for Bithumb and Upbit was already 11 times higher than the figures recorded for the same period in 2020. Earlier in June, Cointelegraph reported that bank account flows for exchanges in the country were up. 40% in the last year.
The revenue growth of South Korean crypto exchanges has even had a ripple effect on banking partners and investors. Upbits’ main banker K Bank has seen a sharp turnaround in its financial performance and is reportedly targeting 2022 for an IPO.
While Bitcoin fever characterized the crypto trading mania in early 2021, the trend turned to altcoins as the year progressed. With token prices soaring through May, South Korean crypto traders appeared to favor smaller-cap altcoins.
Such was the extent of the altcoin trading mania that the Korean Federation of Banks warned of trends and potential risks. At the time, even the Big Four’s order books showed that BTC trading activity was less than 5% of their 24-hour trading activity, which was significantly lower than Bitcoin’s global average on others. platforms.
None of our business, says FSC
As is often the case with regulatory measures in South Korea, smaller exchanges could face much greater operational difficulties if the ban on cross-trading of FSCs becomes law. Assuming that platforms will be reluctant to forgo trading fee income, South Korean cryptocurrency exchanges will have to find an alternative.
The most likely alternative would be to create a separate trading desk dedicated to converting crypto trading fees into Korean won. However, any new business related to crypto trading in South Korea must be registered with the FSC’s Financial Intelligence Unit and adhere to strict anti-money laundering (AML) laws.
This registration comes with a significant financial burden that could be too heavy for small platforms that are still struggling to meet the September license deadline. Another possible option for exchanges would be to partner with loan providers who are open to accepting crypto as collateral.
Related: South Koreans Flock To Crypto Amid Heavy Regulatory Approach
Whichever route you choose, the exchanges can hardly afford to avoid finding a solution to the problem if cross trading is banned by the FSC. Besides the obvious income implications, crypto trading fees also attract withholding taxes.
For the FSC, this particular problem is a problem that the exchanges will have to solve on their own. Supporting its decision to pursue a cross-trade ban, the commission said allowing traders to trade against their clients constitutes a conflict of interest with significant price manipulation risks.
As to the question of finding other ways to repatriate the Korean won trading fee, the FSC said: whether you want to change the cryptocurrency to another asset (other than the won) or keep the cryptocurrency, you have to find a solution yourself.
Is it for small exchanges?
Responding to Cointelegraphs request for comment, an FSC spokesperson for foreign media relations said:
As the authorities are currently working on changes to the relevant law, it would be inappropriate to comment on your questions now while specific measures are still being developed. When specific actions are ready to be announced, we will post them on our website.
For Lee Chul-ie, CEO of South Korean cryptocurrency exchange Foblgate, the proposed cross-trade ban is just another blow to the country’s small exchanges. Speaking to the Financial Times, Chul-ie said: We are facing an existential crisis. We want to legitimize our activity but the banks are reluctant to offer us real name accounts.
According to the exchange operator, additional issues such as cross-trade bans could push small platforms out of the country or look for gray areas to bypass strict regulatory measures.
However, Jeff Kang, country manager for South Korea at blockchain security firm CoolBitX, believes that some smaller exchanges will be able to handle the situation. In a conversation with Cointelegraph, Kang said:
While it appears that increased scrutiny from South Korea’s FSC may be disheartening news for the local cryptocurrency industry, the situation is not as dire as it seems. The Korean government’s position on cryptocurrencies is not to completely eliminate their use, but to take into account consumer protection and eradicate financial terrorism and money laundering.
According to Kang, the goal of FSCs is not to force exchanges out of the country but to ensure robust AML compliance protocols, adding: In light of this, cryptocurrency exchanges will need to report their resolute position to double compliance efforts to achieve licenses before the September deadline.
Kang also said that up to six other exchanges are set to receive real-name trading account licenses, bringing the total to 10. However, even if that happens, there will still be over 50. stock exchanges in South Korea with uncertain regulatory status. which will probably be forced to close their operations by the September deadline.
For banks, their reluctance to deal with exchanges stems from the fact that financial institutions in South Korea can be held responsible for the misdeeds of their cryptocurrency exchange partners.
This situation could be set to change, with discussions underway between banks and the FSC to limit the liability of commercial banks for wrongdoing by their crypto exchange clients. These talks are also part of a larger agenda that will see banks classifying crypto exchanges as high risk clients.
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