South Korea, the nation with the third largest cryptocurrency exchange market by daily volume behind the U.S. and Japan, has seen a sharp decline in trading activity since 2018.
In December 2017, when the demand for cryptocurrencies achieved a record high in South Korea, the so-called “Kimchi Premium” occurred as investors rushed in to invest in the asset class. The premium of Bitcoin in the local market surged to as high as 54%.
Since then, two major policies from the government of South Korea that include the prohibition of foreigners trading cryptocurrencies in South Korea and the requirement of exchanges to implement strict Know Your Customer (KYC) procedures brought back stability in the South Korean market.
Today, however, there is a noticeable drop in daily volume across South Korea’s largest cryptocurrency exchanges. This indicates stagnancy in prices, demand, and overall interest towards the asset class.
The daily volume of Bithumb, for instance, the largest cryptocurrency trading platform in South Korea alongside UPbit, has dropped by 83% since October 2018, from 1.2 million BTC to 200,000 BTC.
This drop, of course, is not just a Korean phenomenon. Bitcoin has fallen by around 55% from its record high at $19,961 across major exchanges including Coinbase, BitMEX, and Bitfinex, while other major alternative cryptocurrencies including Ethereum and XRP have fallen by 85 to 97% against the U.S. dollar.
Factors behind the decline in volume of Bitcoin exchanges in South Korea
The main factors behind the decline in the volume of Bitcoin and other cryptocurrencies across South Korea’s top three exchanges appear to be: ambiguity in the regulatory frameworks for cryptocurrency trading, the abrupt crash in the price of Bitcoin in January 2018, and the substantial drop of alternative cryptocurrencies.
During the peak of the bull market, the middle class of South Korea went into a frenzy. For some millennials and many middle class investors, crypto was the hope for the next rags to riches story, after the country’s real estate boom. When the market fell, ordinary people suffered large losses after making risky investments in cryptocurrencies including Bitcoin.
Korea’s confusing official position has certainly not helped matters. In January 2018, former Justice Minister Park Sang-ki said that domestic trading on cryptocurrency exchanges would be banned.
“There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges,” Park said.
Korea’s finance minister later said that there would be no such ban, and the government of South Korea gradually moved towards regulating the space and legalizing cryptocurrency exchanges, confusing investors regarding the official stance of the government.
Some of the decline in volume, however, has to do with controversy at the exchange level. While Bithumb and UPbit are the largest cryptocurrency trading platforms in South Korea by a large margin, UPbit has been able to consistently serve a broader base of investors and traders by supporting the majority of banks in South Korea.
In contrast, Bithumb, through a strategic partnership with a major bank called Nonghyup, has only been able to support deposits and withdrawals in South Korean won through Nonghyup.
Theoretically, UPbit should see significantly higher volumes than Bithumb since it supports major banks in South Korea. This has been evident throughout the past six months. From February to August of this year, UPbit recorded higher volumes than Bithumb, especially for three months from April to July, when the Bitcoin price achieved its yearly high at just below $14,000.
The abrupt dip in the volume of UPbit in the second half of 2018 appears to be due to the investigation into the firm’s alleged wash trading and fraud by the public prosecutors’ office. In late 2018, following a raid by the prosecutors’ office of South Korea for various charges in May, trading activity on UPbit declined by nearly 80%.
The prosecutors’ office followed up with a lawsuit against four former stakeholders of the exchange in December, providing the company with some closure regarding the investigation, and since then, UPbit has gradually rebounded.
In December 2018, the UPbit team said:
“The case is related to some transactions during a three-month period, from September 24 to December 31 (Date of opening the service: October 24). This was when our company was preparing for and has just launched Upbit service. All transactions which took place in Upbit after that period are not related to the case.
For eight months of investigation, our company has sincerely explained to the Prosecutors' Office about the case. Upbit did not commit wash trading (cross trading), imaginary orders (provision of liquidity), or fraudulent trading. The company did not trade cypto-currencies which it didn't own, or have its staff and employees benefit from such trading.”
The high profile investigation into UPbit, operated by Dunamu—a company with close ties to Kakao as it operates KakaoStock that has consistently been the country’s top exchange—is likely to have fueled the drop in the confidence of local investors in the infrastructure supporting the asset class at the time the investigation was first initiated.
Can volumes recover?
Since 2018, a new wave of cryptocurrency exchanges in South Korea have emerged with the backing of some of the largest banks in the country. Gopax, for instance, is backed by Shinhan Bank, the second biggest commercial bank in the nation, and allows near-instant withdrawals to Shinhan bank account holders.
As cryptocurrency exchange infrastructure improves and transparency regarding banking services increases, the confidence of investors could recover over the long term.
South Korea, following the release of the guidance of the G7 and the Financial Action Task Force (FATF), has also been moving towards establishing clearer frameworks for both cryptocurrency exchanges and investors, creating a more stable environment for businesses.
Financial authorities in South Korea have adhered to the guidelines of the FATF, requesting regulated cryptocurrency exchanges to follow the requirements set forth by the financial watchdog of the G7.
Two of the many requirements of the FATF to firms regarded as “virtual asset service providers” are delisting of anonymous cryptocurrencies and the implementation of a stricter know-your-customer (KYC) system to prevent money laundering.
“Recognizing the need to adequately mitigate the money laundering and terrorist financing risks associated with virtual asset activities, the FATF is setting out more detailed implementation requirements for effective regulation and supervision/monitoring of virtual asset service providers,” the FATF said.
Major cryptocurrency exchanges in South Korea including Bithumb, UPbit, and Korbit have followed the guidelines established during the plenary meeting of the FATF in February 2019.
In September 2019, UPbit said that it delisted privacy-focused cryptocurrencies to comply with the FATF’s guidelines. Korbit has also disallowed the trading of Monero and other anonymous cryptocurrencies, while Monero is still listed on Bithumb with a Korean won trading pair.
Expect changes in South Korea’s exchange landscape
Bithumb has had issues as well. According to local reports, Bithumb may go through a restructuring with another acquisition deal from its former co-CEO, as the acquisition of Bithumb by BXA Consortium has run into a roadblock.
ZDNet Korea reports that in October 2018, BXA Consortium agreed to acquire 51% of BTC Holding Company (Bithumb) at a valuation of $345 million. BXA Consortium paid about $112 million of the $345 million and delayed the processing of the remaining amount to September 30. However, the company failed to complete the transaction by the agreed upon date. If Kim Jae-wook, the former co-CEO of Bithumb, completes the pending deal, his company Vidente will hold 32.74% of Bithumb, becoming the biggest shareholder.
This means that the top spot in the cryptocurrency exchange market may be up for grabs, despite the dominance of Bithumb and UPbit, considering various incidents both companies experienced, such as Bithumb’s reported struggle to finalize the acquisition deal with BXA Consortium and the investigation into UPbit late last year.
South Korea likely to remain as a major cryptocurrency exchange market
Based on the data published by Coinhills, the South Korean won is the third most traded national currency for Bitcoin, accounting for 3.05% of the global Bitcoin market.
With the government moving towards establishing clear regulatory frameworks, the South Korean cryptocurrency market has the potential to expand throughout the years to come with the support from regional governments.
Busan, a metro city, and Jeju Island, an autonomous region within South Korea, have both set up special economic zones for blockchain and cryptocurrency-related companies to grow the local cryptocurrency industry.
As such, despite the noticeable drop in the daily volume of cryptocurrencies across the country’s top exchanges, with the support from the government, the cryptocurrency market of South Korea is likely to maintain its position as a key player in Asia.