South Korean financial regulators are under increasing pressure to approve cryptocurrency exchange-traded funds (ETFs) following the US Securities and Exchange Commission's (SEC) green light for similar products linked to Ethereum in May 2024.
This comes just months after the SEC allowed Bitcoin ETFs in January 2024, marking a significant shift in the US approach towards digital assets.
However, South Korea's Financial Services Commission (FSC) and Financial Supervisory Service (FSS) remain hesitant.
They cite the Capital Markets Act, which restricts ETFs to underlying assets like traditional securities and commodities. This regulation excludes cryptocurrencies, leaving South Korea behind the curve compared to the US.
A report by the Korea Financial Intelligence Unit (KOFIU) reveals a booming crypto market in South Korea throughout the second half of 2023. The number of crypto investors surged by 390,000, reaching a total of 6.45 million by year-end.
This translates to a 6% increase compared to figures from June 2023, highlighting the nation's growing interest in cryptocurrency.
The KOFIU report delves into investor profiles, showcasing a diverse range of financial commitments. Around 80,500 investors hold accounts exceeding 100 million Korean won (roughly $74,280) on domestic exchanges.
Conversely, a substantial portion, nearly 65%, invest with less than 500,000 Korean won (approximately $371.40) in their accounts.
For high-net-worth individuals, the report identifies a staggering 2,500 investors with holdings exceeding 1 billion Korean won (around $742,815).
Interestingly, over 99% of these high-value investors are classified as "individual" participants, highlighting a significant presence of independent wealth in the Korean crypto market.
This distribution reflects a broad spectrum of investment sizes, indicating varying risk tolerance and engagement levels among South Korean crypto enthusiasts.
Survey Findings from KOFIU on Cryptocurrencies. (Source: KOFIU)
KOFIU's data showcases a significant increase in trading activity. The average daily trading volume across 22 virtual asset exchanges in Korea during the second half of 2023 reached approximately 3.6 trillion Korean won ($2.6 billion).
This represents a substantial 24% rise compared to the first half of the year. Moreover, the total value of crypto held by registered exchanges skyrocketed by 53%, reaching 43.6 trillion Korean won ($32.36 billion).
The report attributes this growth to a 21% surge in total Korean won (KRW) deposits, likely fueled by rising cryptocurrency prices and a more positive investor sentiment.
The report also unveils a distinct trading pattern in Korea compared to global exchanges. Bitcoin, typically dominating nearly 50% of global exchange transactions, holds a significantly smaller share of 27.5% in Korea.
This suggests a preference for alternative cryptocurrencies (altcoins) among Korean investors.
The dominance of altcoins is further emphasised by Ripple (XRP) taking the second-largest share of domestic transactions at 15.4%.
Ethereum follows closely behind with an 8.4% share. Dogecoin (DOGE) and Ethereum Classic (ETC) round out the top five, capturing 2.9% and 2.8% of the market, respectively.
A new report by blockchain market consultancy DeSpread also suggests that altcoin interest is a major factor behind the continuing rise of South Korea's crypto market, further supports KOFIU’s data.
The report highlights "altcoin preference" as one of the key characteristics of the domestic virtual currency market in South Korea.
Users on domestic crypto exchanges are found to trade primarily in altcoins, rather than established players like Bitcoin (BTC) and Ethereum (ETH).
This is further supported by data from major South Korean crypto exchanges like Bithumb and Coinone, which show altcoin pairings dominating their trading charts.
Top cryptocurrency pairs traded on South Korea's Bithumb exchange as of 27 May. (Source: CoinGecko)
Top cryptocurrency pairs traded on South Korea's Coinone exchange as of 27 May. (Source: CoinGecko)
DeSpread's report also sheds light on the significant influence of the South Korean market on global altcoin trading.
The consultancy points to Stacks (STX) as a prime example, where a staggering 90% of the global trading volume on August 5, 2023, originated from domestic Korean exchanges.
Similarly, the report finds that South Korea has, at times, contributed up to 60% of the global trading volume for Blur (BLUR), a token associated with the NFT marketplace.
The report goes beyond trading data to explore user behaviour through search engine trends.
It reveals that South Koreans were more likely to conduct crypto-related web searches in 2023 compared to their counterparts in the US and Japan.
Interestingly, while users in the US and Japan favoured searches related to stocks, South Koreans overwhelmingly searched for the term "코인" (coin), which primarily refers to altcoins within the Korean context.
Furthermore, the report highlights a proportional increase in searches for "Bitcoin" by South Korean users compared to the US and Japan in 2023.
The report by DeSpread also identifies a rise in mentions of the South Korean crypto market on international media websites.
The authors note a "steady increase" in South Korea-focused crypto news since 2021, with a sharp surge in 2022. The coverage in 2022 was heavily centred on Do Kwon and the collapse of the Terra ecosystem.
However, the report concludes that recent media attention has shifted towards a broader view of the South Korean crypto landscape, including the regulatory environment.
South Korea has emerged as a global leader in cryptocurrency adoption and trading, fueled by a confluence of economic, technological, and social factors. Here's a breakdown of the key drivers:
South Korea boasts a robust economy, but youth unemployment remains a persistent challenge. In 2020, the unemployment rate hovered between 7.5% and 11%, impacting young graduates.
Cryptocurrencies, with their potential for high returns, became an attractive alternative investment, offering a glimmer of financial security in a competitive job market.
A 2021 survey revealed that nearly 40% of surveyed South Korean workers had invested in crypto, with a significant portion being in their 20s and 30s.
This demographic saw crypto as a way to stand out in a homogenous and highly educated workforce.
South Korea has a long history of embracing new technologies. The country boasts some of the world's fastest internet speeds and a well-developed telecommunications infrastructure, fostering a thriving mobile payment ecosystem.
This familiarity with microtransactions translated well to the cryptocurrency market. The popularity of online gaming, where players make small, frequent purchases, further fueled this trend.
A case in point is Hangame, a Korean gaming company, which thrived on micropayments as early as 2001. This comfort level with digital payments primed South Koreans for the adoption of cryptocurrencies.
North Korea's nuclear ambitions and proximity to South Korea create a sense of unease among the South Korean population.
Bitcoin's stateless nature – not being tied to any one country – makes it particularly appealing to investors wary of potential political and economic instability.
This distrust extends to traditional financial institutions, with some South Koreans viewing crypto as a hedge against a volatile local market.
The South Korean government initially adopted a cautious approach towards cryptocurrencies.
However, recognising the sector's potential, they implemented regulations in 2020 to oversee the burgeoning ecosystem and prevent money laundering. This move aimed to strike a balance between fostering innovation and protecting consumers.
The 2024 Digital Asset Basic Act (DABA) exemplifies this approach, aiming to promote responsible development of the blockchain industry while safeguarding investor interests.
Additionally, the Virtual Asset User Protection Act, coming into effect in July 2024, establishes stricter penalties for crypto-related crimes.
South Korea's Ministry of Justice is taking a hard line on cryptocurrency crime by launching a special task force to combat fraud and market manipulation in the industry.
This move signals a significant crackdown on illegal activities within the country's crypto sector.
The task force, established in collaboration with local regulatory bodies, will target specific areas of concern, including price manipulation, unregistered crypto exchanges, and deposit fraud.
These illegal activities have been on the rise in South Korea, causing financial harm to citizens.
According to a regulatory document, illicit crypto-related activity in South Korea has already surpassed a staggering $1.6 billion in 2024.
The task force aims to dismantle fraudulent schemes that lure investors with promises of high returns on crypto investments.
Furthermore, the Ministry of Justice is preparing to implement the Virtual Asset User Protection Act in July.
This act is designed to safeguard the assets of crypto users and promote a more secure trading environment.
The pressure to embrace cryptocurrencies is growing, with calls for exchange-traded funds (ETFs) to be approved for major cryptocurrencies like Bitcoin and Ethereum.
This follows the recent approval of spot Ethereum ETFs by the U.S. Securities and Exchange Commission.
Industry experts and investors are urging South Korea to adapt. Xangle, a Seoul-based data provider, argues that the current regulations are outdated and fail to acknowledge the growing importance of digital assets.
The Korean Stockholders' Alliance, led by Jung Eui-jung, echoes this sentiment. Jung warns that South Korea risks losing investors to the US market if it doesn't follow suit and approve Bitcoin and Ethereum ETFs.
This potential outflow of capital could weaken South Korea's position in the global financial landscape.
The Korean won recently surpassed the US dollar in terms of trading volume among fiat currencies used for crypto transactions.
Cryptocurrency remains a prominent topic in Korean politics, with both major parties incorporating crypto-related promises into their political campaigns to attract voters.
In April, the People Power Party, aligned with President Yoon Suk Yeol, advocated for a delay in the implementation of a digital asset tax.
Adding to the pressure, the main opposition Democratic Party of Korea (DPK) has pledged to address the issue of lowering barriers for digital assets.
This aligns with their campaign promises from the April general election.
Additionally, FSS Governor Lee Bok-hyun has hinted at the possibility of public discussions on allowing cryptocurrencies in traditional finance sometime in the latter half of 2024.
The global acceptance of Ethereum ETFs, further fueled by Hong Kong's embrace of these instruments, has created a critical juncture for South Korea.
The country must decide whether to maintain its cautious stance or embrace the changing landscape of digital assets.
Embracing this innovation could solidify South Korea's position as a leader in the fintech industry, while lagging behind could lead to missed opportunities for innovation and hinder capital inflows.
Striking a balance between fostering innovation and ensuring financial stability will be crucial for South Korea's future in the digital asset era.
South Korean authorities have linked the 2019 Upbit exchange hack to North Korea, with over $1 billion worth of stolen ether. The investigation, aided by the FBI and Swiss authorities, traced the stolen funds, recovering some of the assets.
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