South Korea, once among the top five countries contributing fiat to crypto markets, will officially slash the number of exchanges approved for Korean won trading on Friday.
Of the 66 exchanges that were operating in South Korea, only 29 met an application deadline to put themselves under regulatory supervision set by the country’s Financial Services Commission (FSC).
As of Tuesday, Yonhap has not published an update, nor has Reuters. (Protos will keep you updated as the story develops).
Earlier this year, the FSC demanded that dozens of unregistered exchanges submit a formal application for authorization.
But only the aforementioned four passed regulatory scrutiny.
Those same exchanges had formed an alliance in July to comply with the so-called Travel Rule — new global standards for financial reporting set for worldwide rollout next March.
Some additional exchanges, beyond the four that currently have approval, may still facilitate non-fiat, crypto-to-crypto trading.
Applicants had to substantiate their cybersecurity resilience and answer questions regarding their fiat-to-crypto legal compliance.
Many exchanges hesitated to apply due to the likelihood that they would not meet regulatory standards.
Defying South Korea’s crypto rules could mean jail
The FSC’s top reason for denial? Banking. Cryptocurrency exchanges have myriad challenges maintaining bank accounts, which was one requirement for gaining the Commission’s approval.
Some exchange operators also failed to implement anti-money laundering (AML) practices, ostensibly to protect against unwarranted invasion of their users’ privacy.
If the disapproved exchanges continue operating after Friday, their owners face recurring fines of up to 50 million won (about $42,000) and up to five years in jail.
The Korea Financial Intelligence Unit gave exchanges six months’ notice to implement AML protocols.
Friday is the deadline. If the exchanges don’t meet that deadline, they could go out of business.
It’s worth noting that South Korea’s People Power Party has introduced legislation that would eliminate the requirement for “real-name” documents to open a bank account.
Bitcoin’s ‘kimchi premium’
In 2016, cryptocurrencies grew disproportionately popular within South Korea, contributing to a price imbalance dubbed the “kimchi premium.”
The price of Bitcoin on South Korean exchanges traded materially higher than on foreign exchanges.
This phenomenon gained international notoriety near the end of 2017, when Bitcoin’s kimchi premium soared as high as 30%.
In early 2018, that premium extended to an incredible 50%.
Whether it was general interest in technology and online gambling, or a lack of high-return investment opportunities, entrepreneurs capitalized on the situation.
Arbitrageurs flew to the country to sell foreign-purchased Bitcoin for extra Korean won. They then tried to convert that cash to other assets.
The kimchi premium soon sparked regulatory concerns related to money laundering, plus other banking directives.
It was during this heyday that many of South Korea’s largest crypto exchanges were born.
Soon, entities like the international Financial Action Task Force expressed concern. The work of profiting from the kimchi premium could theoretically be used to cover up money laundering.
And then in 2018, hackers attacked Bithumb and stole 35 billion won ($31 million) worth of cryptocurrencies.
Eventually, the premium decayed — but not before the arbitrage opportunity had attracted billions in international investment and permanently altered the trajectory of South Korea’s crypto exchanges.
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