Overview of Korean blockchain market
The virtual asset market in South Korea has shown continuous growth over the past few years.
Since 2021, it has experienced rapid upward trends, attributed to active participation from domestic investors.
1.1 Market Size
The virtual asset market in South Korea is experiencing consistent growth. The number of assets listed on local exchanges is currently at 1,371, marking a steady increase of approximately 10% every six months. Concurrently(2022), the number of active users engaging in virtual asset trading has also seen a significant uptick, with an increase of 25% during the same period, bringing the total to around 6.9 million active traders.
The average daily trading volume of virtual assets in South Korea is around $8.7 billion (2022). This trading volume is comparable to the KOSPI and KOSDAQ indices. South Korea accounts for 8.7% of the global Bitcoin trading volume, ranking second after Japan, which accounts for 11.3% of the volume. While individual customer accounts have decreased by 20%, corporate customer accounts have increased by 24%, indicating growing institutional investor participation alongside the introduction of regulations.
1.2 Exchange Landscape & Asset Composition
Since March 2021, exchanges have to mandatorily register license for virtual asset exchanges in South Korea to establish partnership with real-name bank accounts, the top five cryptocurrency exchanges in South Korea are Upbit, Bithumb, Coinone, Korbit, and Gopax. Other exchanges that failed to secure real-name bank accounts were forced to suspend trading KRW pair.
Upbit holds a dominant market share of 82.6% and boasts a significant trading volume of $1.08 trillion. Three South Korean exchanges rank among the top 10 globally based on trading volume. The total daily trading volume is $4 billion.
Asset Composition
Bitcoin and Ethereum are the most actively traded major assets in the South Korean virtual asset market.
Other altcoins such as Ripple, Bitcoin Cash, and Chainlink are also traded on various exchanges.
Virtual asset investors are diversifying their portfolios based on asset value and potential, while keeping an eye on emerging projects.
Blockchain Adoption Landscape
As major Korean companies prepare for the anticipated Web 3.0 adoption, blockchain technology is gradually being incorporated across various industries. This technology is anticipated amongst major companies to create significant use cases beyond specific industries and lead to a real paradigm shift of internet.
1.1 Key Sectors
Several key sectors are leading blockchain adoption in South Korea:
Finance:
Securities Firms:
Development of platforms for STO token issuance and distribution.
Trading of listed Korean alternative exchange stocks and virtual assets.
Banks:
Preparation for virtual asset-related businesses.
Enhancement of custody services.
Gaming:
High adoption rates by major gaming companies such as Netmarble, Com2uS, WeMade, Kakao Games, and Neowiz.
Entertainment:
NFT issuance based on IP by SM Entertainment, Hybe.
NFT-based membership services in fashion, distribution, and department stores.
Metaverse integration in entertainment (SM Entertainment's Aespa, Hybe's NFT marketplace, etc.)
Consumer Goods:
Integration of blockchain in storytelling and brand promotion (LG H&H).
NFT use in fashion and retail (Shinsegae International, Hazzys, Kolon Sport).
1.2 Impact and Potential Challenges
The adoption of blockchain technology presents both opportunities and challenges:
Opportunities: Potential for new revenue streams, improved customer experience, enhanced transparency, and a shift in business paradigms.
Challenges: Regulatory uncertainty, technology integration and scalability, consumer adaptation & liability, and potential cybersecurity risks.
Current Regulation and Legislation on Virtual Assets in South Korea
1.1 Domestic Regulatory Status
Since March 2021, it has become mandatory for virtual asset exchanges in South Korea to establish connections with real-name bank accounts. This measure aims to enhance identity verification of participants and prevent money laundering.
Domestic exchanges must comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. These regulations aim to verify the identities of participants and the source of their assets to prevent illicit activities.
Regulatory authorities have introduced a direction to classify virtual assets into securities and non-securities and manage them accordingly.
Seminars on regulations for security tokens and the Digital Assets Act were held in September 2022, sharing the regulatory direction of the virtual asset market.
Guidelines are being developed to manage virtual assets as securities or non-securities under the Capital Market Act and the Digital Assets Act.
It is expected that strong consumer protection laws for Centralized Finance (CeFi) will be expanded from May 2023, following the collapse of CeFi exchanges.
Recent incidents have increased skepticism towards the virtual asset market, leading to heightened interest in regulatory directions among market participants.
The "Act on the Protection of Virtual Asset Users" was passed in South Korea on 2023 June 30th, establishing rigorous regulations for virtual asset businesses and financial authorities' supervisory and punitive powers. These include segregating user assets from company assets, limiting self-issued virtual asset trading, and obligating to report suspicious unfair trading practices. The law, coming into effect in July 2024, aims to protect users and establish a fair and transparent market.
1.2 Accounting and Taxation Status of Virtual Assets
Since March 2021, virtual asset exchanges are required to undergo external audits and disclose accounting information. This measure aims to ensure transparency in the financial status and asset management of exchanges.
Virtual asset exchanges must strengthen security measures and internal management systems to ensure the accuracy and reliability of accounting information. This is a measure to maintain investor trust and market stability.
Starting from 2023, corporations are required to collect and organize tax-related documents related to virtual asset transactions within two months from the transaction date and submit them to the relevant tax office. This will facilitate more efficient processing of tax reporting and related procedures for corporate virtual asset transactions.
Taxation on individual virtual asset transactions is scheduled to be implemented from 2025, following the passage of an amendment to the Income Tax Act in the National Assembly.
In July 2023, the Financial Services Commission of South Korea announced accounting guidelines for virtual assets.
This regulation requires companies to include detailed information in the footnotes of financial statements to provide information on virtual asset businesses.
External auditors with relevant audit experience will perform external audits.
This regulation aims to enhance market transparency, facilitate comparisons between companies, and provide more reliable information to investors.
This regulation is scheduled to take effect from January 1, 2024.
This regulation has been promptly announced due to consecutive collapses of CeFi exchanges.
1.3 VASP and ISMS
VASP (Virtual Asset Service Provider) refers to providers of virtual asset services. South Korea is strengthening regulations on VASPs.
VASP Regulation Targets:
Virtual asset exchanges
Virtual asset wallet services
Other services related to virtual assets
ISMS (Information Security Management System) refers to an information security management system. VASPs are required to establish and maintain a secure information protection system.
ISMS Regulation Targets:
Virtual asset exchanges
Other services related to virtual assets
Stablecoin/Payment Environment in South Korea
While major economies (US/China/Japan/EU) are actively taking steps towards regulating stablecoins for investor protection, there is currently no clear regulatory framework for stablecoins in South Korea, and regulatory discussions on these matters are still ongoing.
Currently, discussions are underway at the Bank of Korea regarding how the stablecoin environment in South Korea may evolve. The document titled "Payment Settlement Survey Report No. 2022-3: Key Issues and Legislative Directions in Cryptocurrency Regulation" provides insights into key issues and legislative directions related to cryptocurrency regulation in South Korea.
1.1 Key Issues
Several key issues have been identified in the stablecoin environment:
Increase in stablecoin usage: There has been a growing adoption and use of stablecoins in the South Korean market.
Financial stability and risks: Ensuring the stability of the financial system while addressing potential risks associated with stablecoin operations.
Money laundering and financial security threats: Preventing illicit activities such as money laundering and ensuring financial security within the stablecoin ecosystem.
Transparency and reporting requirements: Enhancing transparency and reporting standards to promote a more accountable stablecoin market.
1.2 Regulatory Direction
The Bank of Korea is discussing regulatory directions to address the aforementioned key issues:
Introduction of licensing and registration requirements
Considering the implementation of a regulatory framework that mandates licensing and registration for stablecoin operators.
Asset holding and segregation
Requiring stablecoin operators to maintain adequate reserves and segregate customer assets from their own assets to enhance financial integrity.
Enhanced transparency and reporting requirements
Strengthening regulations to ensure transparent operations and improve reporting practices within the stablecoin ecosystem.
Reinforcement of financial stability
Implementing measures to enhance financial stability in the context of stablecoin activities.
1.3 Legislative Direction
To improve the stablecoin environment, the Bank of Korea is exploring legislative directions, including:
Introducing comprehensive legislation
Considering the introduction of comprehensive legislation that encompasses stablecoins and provides a legal framework for their operations.
Expansion of licensing and registration requirements
Expanding the scope of licensing and registration obligations for stablecoin operators to ensure regulatory oversight and accountability.
Asset holding and segregation requirements
Mandating stablecoin operators to hold and segregate assets to safeguard user funds and maintain financial integrity.
Strengthening transparency and reporting requirements
Enhancing reporting obligations and transparency standards for stablecoin operators to provide more visibility into their operations.
1.4 USDC (USD Coin) in South Korea
USDC is considered one of the most regulatory-friendly stablecoin, currently positioned #2 stablecoin in terms of market cap($27b), and volume ($2b/24hr)
USDC is listed on the four major South Korean exchanges, including Korbit (with a 0.6% market share), but its trading volume and presence are relatively low.
1.5 Reference case (payment)
Paycoin is the only crypto payment related company registered as a virtual asset service provider (VASP), but the license is approved for its wallet services, not specifically for payment services.
Paycoin, subsidiary of one of largest PG in South Korea, had the largest dApp user base with over 3.2 million users and was affiliated with more than 150,000 stores nationwide.
Regulatory challenges arose when the government stated that wallet and payment providers should register as VASPs, leading Paycoin to acquire ISMS and VASP licenses.
The Financial Information Analysis Institute (FIU) required Paycoin to secure real-name bank accounts like that of exchanges for continued payment services.
Paycoin failed to secure real-name accounts and received a notification of failure to register as a virtual asset service provider for payment from the FIU.
Other cryptocurrency payment services in South Korea operate as prepaid electronic payment methods and are not (nor willing to) registered as virtual asset service providers.
Most cryptocurrency payment platforms support point-based payments, where users can convert cryptocurrencies into points for payments or use cryptocurrencies for specific industries.
Uncertainty remains regarding the government's stance on requiring point providers to register as VASPs, creating an unfair situation for regulatory-first companies like Paycoin.
Future Roadmap for Virtual Asset Regulation and Legislation in South Korea
Despite many discussions, South Korea has currently only enacted regulations for virtual assets from an Anti-Money Laundering (AML) perspective.
South Korea relies heavily on self-regulation by industry consortiums like the DAXA (Digital Asset Exchange Association) for the token circulation process, making it difficult to render legal judgments on token issuance, circulation, and trading.
Efforts are being made to strengthen regulation through collaboration with external evaluators, on-chain (blockchain-based) transaction volume monitoring, virtual asset disclosures, and more.
Consequently, on-chain analysis organizations such as Chainalysis are actively seeking entry into the South Korean market.
Conclusion
The regulatory landscape in South Korea is currently in a state of transition, with discussions and considerations underway. A significant portion, approximately 14%, of the Korean population has participated in cryptocurrency trading, making regulators more sensitive to political and public sentiments. South Korea pays close attention to foreign regulatory frameworks, particularly from the US and EU, and considers them in shaping its own regulations. Despite the lack of clarity, there is a recognition among regulators that blockchain adoption is inevitable, which is driving the discussions on regulations.
Many companies are actively pursuing opportunities in the blockchain industry, as they recognize the potential it holds. While it is beneficial for the government to be cautious and observe the industry's potential, it is important to establish pillars for consumer protection and align with global regulatory developments.
With sufficient research and understanding since the emergence of 'Kimchi Premium' in 2017, South Korea should aim to be at the forefront of global regulations and actively participate in shaping the industry.
References:
National Assembly Research Service. (2021). "2021 National Audit Issues Analysis IV." Research Report on National Audit.
DongA Ilbo. (2021, June 17). "Surprise Announcement: Delisting of 8 Cryptocurrencies at 10 PM."
Sung, H. H. (2020). "Lecture on Capital Market Law."
Segye Ilbo. (2021, November 3). "Ruling Party 'Considering Tax Exemption for Virtual Assets'... Investors Alert."
Chosun Biz. (2021, September 13). "Virtual Assets and 'Regulatory Loopholes'... Upbit's Controversial Approval for Margin Trading."
CoinDesk. (2021, June 21). "Upbit vs. Picacoin: 3 Key Points of Delisting Dispute."
Xangle. (2022, December 6). "A Deep Dive Into One of the Largest Crypto Markets in the World, South Korea." Retrieved from CoinMarketCap.
Bank of Korea. "Payment Settlement Survey Report No. 2022-3: Key Issues and Legislative Directions in Cryptocurrency Regulation."
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