Woori Financial Group has joined the list of leading banking institutions venturing into the digital asset custody services (DACS) sector. The other financial institutions that have also followed the trend include KB Financial Group and Shinhan Financial Group.
In a report issued on July 11, Woori bank’s banking division stated that it entered into a joint venture (JV) deal with Coinplug Inc, a fintech firm that offers bitcoin solutions. Coinplug is also one of the oldest bitcoin exchange firms in South Korea.
Coinplug will be the largest shareholder in the joint venture deal, according to the report. On the other hand, Woori bank will be the second-largest shareholder in the deal. According to sources close to the two firms, the joint venture terms will be finalized by next week, and incorporation will commence shortly after.
Demand for Digital Asset Custody
Digital asset custody is a crypto service that gives investors a safe way of storing and managing digital assets such as cryptocurrencies. Most people that employ digital asset custody services are entities and organizations.
The demand for digital asset custody services in South Korea has increased significantly following a boom in crypto adoption in the country. More entities in South Korea have been investing heavily in cryptocurrencies to diversify their portfolios or grow their profits through HODLing.
Banks Offering Digital Asset Custody Services
Because of the increasing demand, leading banks in South Korea have opened digital asset custody services. KB Kookmin Bank started offering digital asset custody services by launching the Korea Digital Asset Co. (KODA). The bank partnered with Haechi Labs and Hashed, two leading blockchain-based companies in South Korea, to launch this service.
The other leading bank that also offers digital asset services is Shinhan Bank. The bank ventured into the sector at the beginning of the year by investing in Korea Digital Asset Custody Co. (KDAC), a firm launched by Korbit, a crypto exchange firm.
After Woori Bank’s venture in the area, other banks are also expected to follow suit. NH Bank is expected to launch a digital asset custody service through a partnership with Korea Information Communications Co. and a startup blockchain firm, Hexlant Inc.
Crypto Regulations in South Korea
South Korea’s regulations about cryptocurrencies are strict, given that domestic institutions are not allowed to offer crypto exchange services. This means that firms in the country have to store their cryptocurrencies in external devices such as USB drives; hence there is a heightened risk of loss. Due to this limitation, the demand for digital asset custody services has increased since the crypto boom.
Institutions pick banks as custodians of their digital assets because of a high level of trust and reliability. While these banks offer custody services, the law in South Korea also forbids banks from being direct digital asset custodians. This is the reason why most banks offer digital asset custody through partnerships with blockchain firms.
Differences to Traditional Regulatory Environments
This regulatory environment in South Korea is different from what is available in Japan and Switzerland. These two countries allow direct offerings of digital asset custody services. The US market regulator also enables financial institutions to offer digital asset custody services directly.
According to the former chief of KB Kookmin’s IT Technology Innovation Centre, “the digital asset custody contracts must abide by the same customer identification and anti-money laundering systems currently run by the banks. Unlike the cryptocurrency trading business that has a high level of uncertainties, the banks understand that the digital asset custody business can be largely under their control and also falls under their expertise area.”
Financial experts have argued that regulators needed to loosen the restrictions and allow direct offerings of DACS by the financial sector. According to these experts, the field was less risky, boosting the revenue stream for banks. Digital asset custody is less risky compared to the financial risk associated with cryptocurrency trading. Hence, the regulators needed to relax the restrictions that were enforced on this sector.