South Korea is currently re-evaluating the relationship between local cryptocurrency exchanges and banks with the goal of fostering a more equitable market environment. The existing practice of each crypto exchange being tied to a single bank has led to limited choices and high barriers to entry for smaller exchanges, despite not being a legal requirement. This setup has become prevalent due to anti-money laundering and identity verification regulations.
The Financial Services Commission and the Fair Trade Commission are collaborating on a review to determine if this longstanding practice is hindering competition and consolidating the dominance of a few major exchanges. Under the current system, exchanges must establish exclusive partnerships with domestic banks to facilitate Korean won deposits and withdrawals, effectively excluding those without such links from offering fiat services.
While this model initially aimed to enhance transparency and risk management, it may now be disadvantaging smaller players within the market. A government-commissioned study revealed that the one-to-one exchange-bank arrangement makes it challenging for newer or smaller exchanges to access banking services, ultimately impeding their growth and competitiveness.
The study also highlighted that the concentration of Korean won-based crypto trading on a small number of large platforms has led to a highly centralized market, where larger exchanges benefit from increased liquidity and faster transactions. This dynamic perpetuates a cycle where users gravitate towards established players, further marginalizing smaller exchanges.
These disparities not only limit market dynamism and innovation but also restrict consumer choice, potentially strengthening the position of dominant exchanges at the expense of fostering healthy competition. In light of these findings, regulators are contemplating adjustments to the current system to promote a more level playing field and support broader market participation.
Furthermore, delays in legislative changes, notably the Digital Asset Basic Act, have added complexity to the regulatory landscape. Originally slated for submission by the end of 2023, the bill has been postponed to 2026, causing uncertainties around the regulatory framework for stablecoins backed by the Korean won. Disagreements regarding the supervision of stablecoin issuers and the role of oversight bodies have contributed to the delay, underscoring the challenges of balancing innovation with regulatory oversight.
The Financial Services Commission is exploring ways to facilitate the involvement of both financial and non-financial entities in the digital asset sector while upholding robust regulatory safeguards. The overarching goal is to foster innovation and market growth while ensuring the protection of investors and maintaining financial stability.
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