South Korea, which has seen widespread cryptocurrency adoption compared to most countries, and was regarded as a crypto haven, maybe become a nightmare for exchanges operating in the Asian region. Crypto-based businesses find it difficult to function with the South Korean government imposing strict regulations on the growing industry.
South Korea Moves to Ban Cross-Trading
According to recent reports from local news media, the country’s regulatory watchdog, the Financial Services Commission (FSC) is planning to ban cross-trading on cryptocurrency exchanges operating in South Korea. The FSC earlier held a meeting with 20 crypto exchanges, with small and medium-sized crypto companies reportedly complaining about the difficulties of operating in the country.
Meanwhile, cross-trading is considered illegal in many jurisdictions, as it involves offsetting buy and sell orders for one asset at the same time. These transactions, in turn, are not recorded on the order book. The South Korean regulator stated that the ban was necessary to prevent operators from manipulating the price, adding that the practice is unfair to retail investors.
According to the FSC, crypto exchange operators have access to more market-sensitive information, and thus, allowing them to trade on their platforms opens up the possibility of company agents trading against their customers. Given the volume of trading coming out of South Korea, regulators say exchanges can orchestrate sudden price swings to the detriment of retail traders.
However, cryptocurrency exchanges in the country do not welcome the new development, stating that the ban on cross-trading will significantly affect their businesses. Local exchanges receive trading fees in crypto, which is then converted to Korean won. But the government’s proposed cross-trading ban could disrupt funds flowing into the crypto trading platform, as the commission received from trading fees is eliminated.
The proposed ban follows an earlier amendment made by the FSC back in March. According to the mandate, crypto-related businesses will have to report to the Financial Intelligence Unit (FIU), which is an arm of the FSC. The new amendment became effective on March 25, and businesses were given till September 24 to report to the FIU.
Crypto Regulations Not Favorable for South Korean Exchanges
The stringent policies imposed on the South Korean crypto industry by the government have caused exchanges to consider operating abroad. According to Lee Chul-ie, the head of crypto exchange Foblgate:
“We are facing an existential crisis. We want to legitimize our business but banks are reluctant to offer us real-name accounts. More problems will occur if all these exchanges are left to operate in the grey area. We may have to take our business offshore.”
However, the FSC appears unsympathetic to the plight of crypto exchanges in the country, stating:
“Whether you change the cryptocurrency to another asset (not the won) or keep holding the cryptocurrency, you must find a solution yourself. “
One solution could be for exchanges to offer the crypto collected as fees for collateral to obtain loans for tax payment purposes. However, any such solution likely presents even greater compliance costs, especially for the smaller exchanges already grappling with stringent licensing requirements.
Meanwhile, South Korea’s controversial crypto tax policy comes into effect in January 2022. According to the government, the tax policy will impose a 20% levy on crypto trading profits that exceed 2.5 million won ($2,241).
However, the incoming tax law received criticisms from South Korean economists back in 2020. Some of the critics asked the government not to be hasty in introducing a tax law on the nascent industry, as the move could stifle the growth of the cryptocurrency sector in the country.