On September 24, 2021, the deadline for submitting a request for an official license for crypto exchanges in South Korea from the local regulator of the Financial Services Commission (FSC) is coming to an end.
Prior to this, the decision on the need for a license was repeatedly criticized by local cryptocurrency companies. Many experts suggest that the licensing model will help monopolize the crypto business within the country. And because of this, problems can arise. Let’s talk about the situation in more detail.
Note that problems with regulators in September arose not only with exchanges in South Korea. Coinbase, the largest US trading platform, also came into the spotlight of the US Securities and Exchange Commission. As representatives of the exchange noted, the Commission was not satisfied with the Lend project, which allows you to earn up to 4 percent per annum on borrowing stablecoins.
At the same time, it is not known what exactly the exchange «violated» with the help of its project.
Be that as it may, the experts advised the leadership of the platform not to follow the lead of the Commission. For example, billionaire Mark Cuban believes that in this case, the head of Coinbase, Brian Armstrong, needs to be more aggressive and, if necessary, go to court. Read more about the situation in a separate article.
Cryptocurrencies in South Korea
The main requirement of the regulator is to provide proof that crypto exchanges work only with South Korean banks. However, many banks in the country refuse to take on the big risks of cooperation with relatively small crypto companies and work only with the four most popular exchanges in South Korea.
These include Upbit, Bithumb, Korbit, and Coinone. These crypto exchanges handle approximately 90 percent of local traders’ transactions, so the FSC designation will only validate the dominant position of the companies in the market. According to Cointelegraph, at least 40 crypto companies inside South Korea will be forced to shut down.
That is, it turns out to be a vicious circle. On the one hand, small cryptocurrency exchanges require cooperation with local banks for their existence and further development. However, at the same time, the banks themselves do not want to risk their reputation and be exposed to the possible risk of conflict with the authorities, therefore they refuse to interact with trading platforms. In such conditions, small market players will simply be forced to suspend their activities, which will make the local market less diversified.
Still, in this case, citizens will be able to choose only among large platforms – and this will create opportunities for a gradual increase in commissions among existing exchanges or something similar.
Top 10 cryptocurrency exchanges in South Korea
Moreover, according to Kim Hyun Jun, professor and head of the Cryptocurrency Research Center at Korea University, the closure of the companies will actually «eliminate» 42 so-called kimchi coins – relatively small altcoins in terms of capitalization, traded on small platforms paired with the Korean won.
Since they will have nowhere to bargain, these projects may simply die. And this will also have a negative impact on investors who have managed to invest in such projects.
The head of local cryptocurrency exchange Foblgate Lee Chul-Yi made the following statement in a recent interview.
Closer to the deadline, there may be a massive withdrawal of funds from altcoins, but not everyone will be able to get their money back, and most investors will lose capital. I wonder how regulators deal with this side effect.
Since altcoins account for about 90 percent of trading volumes on local crypto exchanges, FSC advised exchange operators planning to shut down to notify their customers of further developments by September 17 at the latest. Accordingly, under these conditions, one can expect a massive drain of certain coins that are not traded on major exchanges. Other cryptocurrencies will most likely be transferred to trading platforms.
We believe that the situation with small exchanges in South Korea is strange. In fact, they were left with no choice, and thus the authorities will simply reduce the number of working platforms within the country. While investors will clearly have the opportunity to connect with cryptocurrencies, fewer exchanges are unlikely to foster competition and improve platform performance. Therefore, such a sharp move of the regulators seems to be a desire to directly influence the sphere of coins.