South Korea’s Regulatory Shift on Cryptocurrency

South Korea’s top financial watchdog is re-evaluating the ban on local spot cryptocurrency exchange-traded funds (ETFs) and institutional accounts on crypto exchanges.

According to local news agency News1, the Financial Services Commission (FSC) stated in its annual audit report that its new cryptocurrency committee, an advisory group formed to discuss digital asset policies, will review the current ban. This indicates a departure from the regulator's historically strict opposition to digital asset exposure in traditional financial markets.

Following the January approval of spot bitcoin ETFs in the U.S., the FSC reaffirmed its decision to maintain the ban on local crypto ETF listings, citing potential risks to financial market stability.

Legislators in the country have been advocating for change. Both the winning Democratic Party and the opposition pledged to approve local spot bitcoin ETFs during their general election campaigns this year. The newly elected left-wing party announced in May that it would request the FSC to review the ban.

Since 2018, South Korean institutional investors have been largely prevented from opening cryptocurrency trading accounts on exchanges due to strict FSC guidance.

Upbit Monopoly

In addition to potentially lifting bans on ETFs and institutional crypto accounts, FSC chair Kim Byung-hwan plans to investigate the monopolistic structure of South Korean digital asset exchanges, particularly focusing on Upbit’s dominance.

According to CoinMarketCap data, Upbit handled over 61% of the trade volume in the past 24 hours, processing over $1.17 billion. The platform's market share peaked at around 80% in March.

Kim's comments during the audit were a response to Democratic Party lawmaker Lee Kang-il, who raised concerns about the financial relationship between Upbit and its partner K-bank. South Korean laws require crypto exchanges to maintain user deposits with partner banks.

Lee expressed worries over Upbit's significant influence on K-bank, noting that Upbit deposits accounted for 20% of K-bank's total deposits. He also warned of a potential bank run should their partnership face disruptions.

K-bank, among South Korea’s first digital banks, is preparing for an IPO, and several local reports have cited its reliance on Upbit as a significant risk to the neo bank's public offering plans.