The current situation of the cryptocurrency market in South Korea: Retail frenzy, lack of relevant regulation

Author: Min Jung

Compiled by: Shen Chao TechFlow

Abstract

• Driven by a tech-savvy population, South Korea's cryptocurrency market is characterized by intense retail investment, leading to unique phenomena such as the "kimchi premium" and "listing pump."

• The history of cryptocurrency in South Korea is marked by significant regulatory developments, primarily focused on enhancing market integrity and protecting investors.

• However, despite high trading volumes and notable regulatory progress, the market still poses challenges for developers due to public perception of cryptocurrencies and a lack of relevant regulations.

Figure 1: The Korean won consistently ranks among the top two in global fiat trading volume

Introduction

As a tech powerhouse with widespread internet access and a tech-savvy population, South Korea occupies a significant position in the global cryptocurrency landscape. Retail investors in South Korea are highly active, leading to unique market phenomena such as the "kimchi premium" and "listing pump," reflecting the enthusiasm of its citizens for cryptocurrency investment. However, these behaviors have also drawn the attention of regulators and market observers, prompting the introduction of new regulations that are expected to impact the global cryptocurrency market.

In this research article, we will (1) review the history of cryptocurrency in South Korea, (2) explore the current state of the industry, particularly the phenomena mentioned above and new regulations, and (3) introduce some key players in the domestic market.

History of Cryptocurrency in South Korea

~2017:

• Before 2017, cryptocurrency was not widely adopted in South Korea, consistent with global trends. Notable events include Korbit becoming the first cryptocurrency exchange in South Korea in 2013, followed by Bithumb in 2014.

2017:

• Bull Market: 2017 marked the beginning of South Korea's cryptocurrency frenzy. The bull market attracted millions of retail investors, with Bithumb frequently ranking first in global daily trading volume, and the "kimchi premium" (which will be discussed in detail later) reaching 30-40%.

• ICO Ban: In September 2017, the Financial Services Commission (FSC) of South Korea announced a ban on all forms of Initial Coin Offerings (ICOs) to protect investors and prevent potential financial fraud and speculation. To this day, platforms like CoinList remain banned in South Korea.

• 2018:

• "Park Sang-ki Crisis": In January 2018, Justice Minister Park Sang-ki announced that the government was considering shutting down all cryptocurrency exchanges, leading to significant market turmoil and a sharp drop in Bitcoin prices.

Figure 2: BTC price plummeted significantly after his comments

• Real-name Trading System: On January 30, 2018, South Korea implemented a "real-name trading system," requiring all cryptocurrency exchanges to collaborate with banks to provide real-name verified accounts for trading. This move aimed to increase trading transparency and prevent money laundering activities.

2020/2021:

• Revised Act on Reporting and Using Specific Financial Transaction Information: In March 2020, the National Assembly of South Korea passed amendments to the Act on Reporting and Using Specific Financial Transaction Information (Specific Financial Act), bringing cryptocurrency exchanges under regulatory oversight. The amendment requires all Virtual Asset Service Providers (VASPs) to register with the Financial Services Commission (FSC) and comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. This law took effect in March 2021.

• Following the law's enactment, only 29 out of 63 exchanges successfully registered. Among them, only five exchanges (Upbit, Bithumb, Coinone, Korbit, and later Gopax) obtained Information Security Management System (ISMS) certification and real-name accounts, allowing them to operate in the won market.

• This law also applies to foreign exchanges, forcing companies like Binance to shut down Korean language support and P2P services. As of now, the following three principles apply: no support for the won, no Korean language services, and no direct marketing in Korea.

2022:

• Terra Luna Collapse: In May 2022, the collapse of Terra (LUNA) and its stablecoin UST triggered significant turmoil in the global cryptocurrency market. This event had a profound impact on the entire market, particularly on the psychology of South Korean investors. It also raised widespread concerns about the stability of stablecoins and regulatory oversight. Given Terra's close ties to South Korea, especially through its founder Do Kwon and its ecosystem, this collapse had a significant impact on the South Korean cryptocurrency market.

Figure 3: The collapse of the Terra ecosystem

• DAXA: The Digital Asset Exchange Alliance (DAXA) consists of South Korea's major exchanges (Upbit, Bithumb, Coinone, Korbit, and Gopax) and aims to strengthen cooperation and establish industry standards to better protect investors and maintain market integrity.

• Travel Rule: In accordance with the Financial Action Task Force (FATF) guidelines, South Korea introduced the "travel rule" to enhance transparency in cryptocurrency transactions and combat illegal activities.

2023/2024:

• Haru Invest/Delio Bankruptcy: In 2023, two cryptocurrency digital asset management companies went bankrupt due to alleged Ponzi scheme structures. This event exacerbated negative sentiment in the market following the Luna collapse, highlighting regulatory gaps and investor protection issues, accompanied by allegations of mismanagement and financial misconduct.

• Security Token Offering (STO) Guidelines: In February 2023, the Financial Services Commission announced guidelines for regulating security tokens under the Capital Markets Act. The guidelines focus on determining whether tokens meet securities standards and regulating the issuance and distribution of token securities.

• Virtual Asset User Protection Act: The Virtual Asset User Protection Act, passed in June 2023, aims to protect investors by imposing penalties for price manipulation and other market abuse behaviors. This is the first phase of a comprehensive legislative framework to provide full regulation for digital assets.

2024 and Beyond:

• Virtual Asset User Protection Act: The aforementioned Virtual Asset User Protection Act will take effect on July 19, 2024. While this phase focuses on user protection and preventing abusive trading, the second phase may address market access and operations for virtual asset service providers. However, discussions for the second phase have not yet begun, and considering that the first phase took 20 months to pass, it is expected to take even longer to see specific contents and timelines.

• Cryptocurrency Tax: Cryptocurrency tax has been a key issue during election seasons in South Korea. Since 2022, the implementation of cryptocurrency tax has been repeatedly postponed as part of the government's efforts to attract voters before elections. As of now, a 20% capital gains tax is scheduled to be imposed on annual earnings exceeding 2.5 million won (approximately $1,900) starting in 2025.

Figure 4: Cryptocurrency taxes in various countries

Virtual Asset User Protection Act

As listing on exchanges has become an important milestone for many crypto projects, guidelines and regulations regarding the listing process have garnered significant attention. Currently, there are no clear regulations regarding cryptocurrency listings and delistings on South Korean exchanges. The only existing guidelines come from DAXA, an alliance of the five major South Korean exchanges, which provided a preliminary listing framework in March 2023. However, this guideline has faced criticism for its lack of clarity, prompting DAXA to revise the guidelines by adding more details under the supervision of regulators. These new guidelines will be implemented in accordance with the Virtual Asset User Protection Act, which is expected to be a significant advancement in South Korea's regulatory landscape.

Virtual Asset User Protection Act (가상자산이용자보호법)

The Virtual Asset User Protection Act will take effect on July 19, 2024, focusing on investor activities on exchanges, including:

• Protecting customer deposits

• Increasing custodial responsibilities

• Monitoring suspicious transactions

• Preventing insider trading

Listing/Delisting Guidelines

Under the supervision of the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), DAXA plans to launch "compliance best practices" when the Virtual Asset User Protection Act is implemented. These guidelines include listing and delisting standards, which are currently undergoing industry feedback. The listing review criteria include nine requirements divided into four main areas, reviewed quarterly:

1. Credibility of the issuer

• Failure to disclose important information related to the virtual asset or repeatedly making arbitrary changes without justification.

• Failure to verify the main wallet information of the issuer and operator.

1. User protection measures

• Failure to verify important explanatory materials (white papers) prepared by the issuer and operator related to the virtual asset.

• Lack of on-chain transaction monitoring tools (block explorers).

1. Technical security

• Occurrence of unexplained or unresolved security incidents in virtual assets, wallets, or distributed ledgers.

• Failure to verify the source code of token smart contracts in the distributed ledger, or improper settings of important event functionalities.

1. Compliance

• Issuing coins, dark coins, and other virtual assets deemed illegal.

• Supporting virtual asset transactions that may be used for illegal activities or violate existing regulations.

Virtual assets related to any of the above eight items are considered non-compliant and should not be listed. Additionally, financial authorities have introduced a ninth qualitative review criterion, including the following:

• The capability, social reputation, and past business history of entities related to issuance, operation, and development.

• Disclosure of important information related to the virtual asset.

• Changes in total issuance volume and circulation plans, as well as their transparency and reasonableness.

• Appropriateness of access control settings for important event-related functionalities of token smart contracts.

These evolving guidelines aim to provide a structured and secure environment for cryptocurrency trading in South Korea, addressing current ambiguities and enhancing market integrity.

Where Are We Now?

Retail Frenzy

The retail frenzy in South Korea can be attributed to cultural factors, such as the rapid adoption of technology due to fast internet speeds, a risk-taking culture, and the swift spread of trends in a homogeneous society. Consequently, South Korea has been one of the largest markets in the cryptocurrency space since 2017, with its exchanges becoming important platforms for projects seeking to list. Even today, Upbit consistently ranks among the top five in average trading volume, usually only behind Binance. This is particularly surprising given that South Korean exchanges are limited to residents of South Korea, unlike exchanges like Binance, Coinbase, and HTX that cater to a broader audience.

Figure 5: Upbit ranks second in average trading volume

Kimchi Premium and Listing Pump

Recently, cryptocurrency trading volume in South Korea has surpassed that of KOSDAQ and KOSPI. This phenomenon indicates that cryptocurrency has become deeply embedded in South Korea's financial system. Such intense interest has also sparked some interesting market phenomena: the kimchi premium and listing pump.

Kimchi Premium

The kimchi premium refers to the price difference of cryptocurrencies between South Korean exchanges and global exchanges. Due to regulatory barriers, arbitrage becomes difficult, typically resulting in a 2-3% premium, meaning that cryptocurrency prices on South Korean exchanges are higher. However, during particularly bullish periods, such as in April, this premium can soar to around 14%.

Figure 6: The kimchi premium surges during high-volume bull markets

Listing Pump

Another interesting phenomenon is the listing pump. When Upbit or Bithumb announces that a project is about to be listed, the price of the newly listed cryptocurrency often skyrockets immediately. This phenomenon is influenced by factors such as market capitalization, liquidity, and the availability of perpetual contracts. While listing on South Korean exchanges does help enhance liquidity and is generally seen as positive news, the resulting price pump is often short-lived, typically being a one-time event rather than a sustainable trend.

Figure 7: Asset prices surge after Upbit's listing announcement

However…

Despite progress in regulating exchanges and protecting investors, the Web3 operating and developer environment in South Korea faces significant challenges. Currently, there are no notable South Korean projects in the top 100 by market capitalization, which is surprising given the popularity of crypto assets in South Korea. The main barriers seem to be public attitudes toward cryptocurrencies and regulatory uncertainty surrounding Web3 projects.

While cryptocurrencies are popular in South Korea, they are more often viewed as a form of gambling rather than a long-term investment in Web3 technology. Short-term behaviors in the market, such as the price surges before and after listing/delisting announcements, reinforce this perception. Therefore, the market's focus remains on short-term speculation rather than long-term investments based on Web3 fundamentals. Additionally, the collapse of LUNA in May 2022 intensified negative public sentiment toward cryptocurrencies, leading to strict scrutiny of all crypto projects operating in South Korea by the media. These projects have also become targets for politicians, creating an environment in South Korea that makes it difficult to achieve sustainable growth despite genuine enthusiasm.

Figure 8: South Koreans prefer altcoins over mainstream coins

Factors Increasing Complexity

Ambiguous regulations also play a significant role in this. While government officials are actively working on a regulatory framework, existing regulations primarily focus on investor protection, with less emphasis on supporting innovation and industry development. For instance, the requirements for Virtual Asset Service Provider (VASP) licenses only apply to exchanges, wallets, and custodians, while the initial phase of the Virtual Asset User Protection Act mainly addresses operational aspects of exchanges. Furthermore, South Korea's ban on Play-to-Earn (P2E) games has led to a complex situation where top global Web2 gaming companies establish operations in South Korea to tap into local talent, but their services target overseas markets. This regulatory ambiguity and delay have forced many South Korean developers to relocate their businesses to more favorable jurisdictions like Singapore, despite South Korea's strong technological capabilities, local innovation remains stifled.

Key Players in the South Korean Crypto Market

Exchanges

Although there are no clear regulations, futures trading of cryptocurrencies is generally not allowed in South Korea due to restrictions from the Financial Services Commission (FSC). Therefore, the South Korean cryptocurrency market is primarily dominated by five major spot exchanges: Upbit, Bithumb, Coinone, Korbit, and Gopax. These exchanges hold a significant market share, with Upbit and Bithumb accounting for nearly 96% of total trading volume.

Figure 9: Market share of South Korean exchanges as of today

• Upbit: Upbit, owned by Dunamu, is the undisputed largest cryptocurrency exchange in South Korea. Dunamu also operates Luniverse (a Web3 product), a stock trading platform, and even a second-hand watch trading platform. Currently, its valuation in the OTC market is approximately $2.5 billion, with Dunamu's sales reaching $2.7 billion in 2023. Today, Upbit offers KRW/BTC/USDT trading pairs, with most trading volume coming from the KRW market.

• Bithumb: Although Bithumb's governance structure has been unclear, the exchange currently has an estimated valuation of approximately $289 million in the OTC market and has announced plans for an IPO in 2025. Bithumb was the market leader until 2020 but subsequently lost significant market share to Upbit. Nevertheless, through aggressive fee policies, Bithumb has recently regained market share and continues to play a significant role in the "listing pump" phenomenon.

Figure 10: Historical market share of South Korean exchanges shows Bithumb held the top position before 2020

• Coinone: Coinone holds a market share of 1.1% and was the first South Korean exchange to list Ethereum.

• Gopax: Binance acquired a 72.26% majority stake in Gopax as a strategic move to penetrate the South Korean market. However, due to regulatory uncertainty, the process is still awaiting government approval.

• Korbit: Korbit holds a market share of 0.4% and is the oldest cryptocurrency exchange in South Korea.

Projects

i) Kaia

Kaia is a next-generation blockchain project formed by the merger of Klaytn and Finschia, driven by South Korean tech giants Kakao (Klaytn side) and Naver's Line (Finschia side). The merger aims to integrate the two blockchain platforms into a unified system named Kaia, derived from the Greek word for "and," symbolizing connection. It is planned to launch by the end of this year and is expected to become an important "Korean" layer-1 blockchain. This merger is also one of the few M&A cases in the crypto industry.

1. Who are you, and what is Kaia?

I am John Cho, the Vice President of Marketing at the Klaytn Foundation, currently responsible for our global marketing efforts and expanding channels in key regions. Kaia is the new layer-1 superchain launched after the merger of Klaytn and Finschia chains. As a third-generation blockchain project founded by Kakao (the leading messaging app in Korea) and Line (the dominant messaging platform with 178 million users in Asia), the merging of their ecosystems is a natural progression, fostering the creation of one of Asia's largest blockchains. With Finschia's expertise in application development and Klaytn's unparalleled technical strength, Kaia is poised not only to catalyze true mainstream adoption of Web3 but also to serve as a gateway to major user bases, liquidity, and talent in Asia.

2. How do you view the current regulatory status of Web3 operations in South Korea, and what changes do you think are needed to promote innovation in this area?

The regulatory environment in South Korea still lags behind the ongoing innovations in the Web3 space. Despite South Korea having the largest cryptocurrency spot trading volume in the world, indicating a huge demand for blockchain technology, lawmakers have yet to provide the clear guidance that local teams and developers need, leading to a brain drain as many teams move to regions with clearer guidance. The current main bottleneck is the regulators' lack of understanding of Web3 technologies and trends, as well as a lack of dialogue with actual developers and teams. To foster innovation and substantial growth in South Korea, developers need clarity; currently, the guidelines are vague, and enforcement lacks consistency. For our industry, regulatory clarity and specificity can help formulate clearer strategies and objectives.

3. Can you share some updates we can expect from Kaia soon?

The official launch of the Kaia mainnet is just around the corner, and in addition to new technical upgrades and added features such as native staking delegation and priority fee mechanisms, we plan to launch a comprehensive ecosystem incentive point system through the Kaia Portal. The Kaia Portal will be our proprietary service discovery and user frontend, allowing users to earn points while leveraging exclusive benefits and participating in on-chain tasks. Through the Kaia Portal, our goal is to incentivize user-level contributions to drive growth and kickstart liquidity. The Portal will launch alongside the new Kaia mainnet.

ii) Delabs

South Korea has long been a leader in the Web2 gaming space, with major companies like Nexon, Netmarble, NCSOFT, and Krafton dominating the global market. As a result, many individuals from these major gaming studios, and even entire studios, are attempting to enter the Web3 space, such as Wemade and Nexon. Delabs Games is also part of this trend, a South Korean gaming studio and a subsidiary of 4:33 Games. Delabs Games was founded by former Nexon head Joon Mo Kwon and is showcasing its capabilities in the Web3 space.

1. Who are you, and what is Delabs Games?

I am Hyunmyung Kim, the Marketing Director of Delabs Games. Delabs Games is a South Korean gaming studio and a subsidiary of the well-known 4:33 Games, with over 13 years of experience in mobile game development, creating many popular games both domestically and internationally. Initially focused on the South Korean market, 4:33 Games later expanded to a global audience. Now, Delabs Games is pioneering the next chapter of gaming by adopting blockchain technology. Over the past two years, Delabs Games has been developing three blockchain games: the casual racing game "Rumble Racing Star," the space refugee survival game "Space Frontier," and the Web3 character collection RPG "Metabolts." In February 2024, we launched our first racing game "Rumble Racing Star," which received a positive response, reaching 10,000 daily active users within five days of release.

3. Why do you think South Korea holds a prominent position in the crypto space?

South Korea's prominent position in the global crypto space can be attributed to several key factors. Economic pressures, including high inflation and housing costs, have led many, especially the so-called "N-Po generation," to turn to high-risk investments in search of financial breakthroughs, making Web3 an attractive option. Despite being the 13th largest economy in the world, South Korea has significant purchasing power in cryptocurrencies, with Upbit ranking among the top exchanges globally in trading volume. Additionally, the country's emphasis on local digital solutions is reflected in successful blockchain projects like Klaytn and WeMade, highlighting South Korea's technological innovation and substantial influence in the global Web3 market.

4. What are your thoughts on the current regulation of Play-to-Earn (P2E) games in South Korea, and how should it change?

The cautious regulations from the Financial Services Commission (FSC) in South Korea restrict P2E games, NFTs, and cryptocurrencies, which may stifle industry growth. Discussions regarding NFT taxation and its classification as virtual assets are still ongoing ahead of the July 2024 implementation of the Virtual Asset User Protection Act. Similar to Japan, establishing safe boundaries for P2E services is crucial. There is an urgent need for a centralized control tower to coordinate regulatory efforts across ministries in the rapidly evolving landscape of blockchain technology. This initiative is vital for ensuring effective management and regulation of these evolving technologies.

5. Can you share some updates we can expect from Delabs soon?

Delabs Games is moving towards TGE (Token Generation Event) and launching our ecosystem under our core concept of "Playable Layer." To showcase the core user experience of the "Playable Layer," we are hosting an event called "Ladybug's Journey." This is a points-based incentive program where users can collect and enhance points by completing various tasks, collecting on-chain assets, and climbing competitive leaderboards. Delabs Games will launch various games, from hardcore AAA titles to casual games on Telegram, to improve accessibility.

Conclusion

The cryptocurrency market in South Korea presents a complex situation characterized by strong retail user investment and regulatory challenges. While South Korea has a highly tech-sensitive populace, the lack of local blockchain projects reflects barriers in regulation and public perception. The upcoming implementation of the Virtual Asset User Protection Act is a step toward addressing these issues, aiming to enhance market integrity and provide clearer operational guidelines. However, to truly leverage its technological advantages and market enthusiasm, South Korea needs to create an environment that supports blockchain innovation, overcome negative public sentiment, and ensure a balanced regulatory framework that encourages long-term investments in Web3 projects for sustainable growth. Only through this balanced approach can South Korea establish itself as a global leader in the ever-evolving cryptocurrency space.