Upbit triggers "Squid Game" at Korean exchange? Under monopoly investigation, holds 20% of digital bank K Bank deposits

Author: Weilin, PANews

On October 11, according to South Korean media reports, Upbit, the largest cryptocurrency exchange by trading volume in South Korea, is facing a market monopoly investigation by local financial regulators. Previously, South Korean media reported multiple times on Upbit's dominant position in its domestic market, with a market share exceeding 80%.

The background of this investigation is closely related to its partner digital bank K Bank's IPO application submitted in September. The unfolding of this event has sparked widespread attention on the close relationship between Upbit and K Bank.

Upbit Accused of Close Ties with K Bank

On October 10, South Korean Democratic Party lawmaker Lee Kang-hee raised questions about Upbit and its partner K Bank during a national government inspection session at the National Assembly. Lee stated that the highest regulatory body "is playing a 'Squid Game' with local cryptocurrency exchanges," allowing Upbit to thrive while sacrificing other competitors.

In response to this situation, he specifically mentioned that Upbit customers' funds account for about 20% of K Bank's deposits. He added, "If Upbit's trading is interrupted, it will lead to a bank run at K Bank." Lee further emphasized that the close ties between Upbit and K Bank violate the principle of separating industrial capital from financial banks, which was established to prevent undue influence of industrial capital on banks.

K Bank, established in 2017, is South Korea's first pure internet bank, initiated by 20 shareholders including Korea Telecom and Ant Financial. K Bank faced financial difficulties in its early days and even had to suspend operations. However, over time, the bank gradually turned the situation around, making progress in customer base and performance. In February of this year, K Bank's customer count reached 10 million, increasing by another 1 million in just three months. The net profit for the first quarter set a record, reaching 50.7 billion won, nearly a 400% increase from last year. Currently, many South Korean digital banks have become profitable, although another internet bank, Kakao Bank, has received more headlines, K Bank has attracted more attention due to its unique business model.

Since 2021, K Bank has established an important partnership with Upbit. K Bank sought to apply for an IPO in 2022, but the plan was later canceled due to deteriorating market conditions. In September of this year, K Bank submitted an IPO application in Seoul again, expecting to raise up to $732 million, which would become the largest public listing in South Korea in nearly three years. However, at the end of last year, in light of the risks posed by K Bank's reliance on cryptocurrency, South Korean lawmaker Kim Hee-gang stated, "At this time, it is not an exaggeration to say that K Bank has degenerated into Upbit's private vault."

On October 10, lawmaker Lee Kang-hee pointed out that as of the end of 2023, about 70% of K Bank's deposits are related to cryptocurrencies, raising questions about K Bank's business model. He stated, "K Bank, with an annual profit margin of less than 1%, offers Upbit customers a custody interest rate of 2.1%. Is this reasonable?" This unreasonable high interest rate not only raised concerns about K Bank's profitability but also led to doubts about its relationship with Upbit. South Korean Democratic Party lawmaker Lee Kang-hee raised questions about Upbit's "monopoly" status and its partner K Bank during a national government inspection session at the National Assembly.

"Squid Game"-style Regulation Raises Concerns

Lee Kang-hee's remarks also sparked deeper reflections, as he compared the current regulatory situation in South Korea to the previously popular South Korean drama "Squid Game." This drama depicts the extreme situation where participants face death if they fail in the game, and he used this vivid metaphor to describe Upbit's absolute control over the market. He stated, "Upbit's cryptocurrency deposit trading commissions account for over 70% of the total in the industry. This effectively makes it the undisputed leader in the industry. According to the Monopoly Regulation and Fair Trade Act, this makes Upbit a monopoly."

Lee further pointed out, "Upbit is the largest cryptocurrency exchange in South Korea and the second largest in the world. However, domestic exchanges active in the fiat and 'cryptocurrency trading pairs' market are gradually disappearing. This is because the cryptocurrency market here is too concentrated in one company."

It is reported that Upbit, operated by Dunamu, was established in 2017. The official website shows that Dunamu's backers include Kakao, Kakao Ventures, Woori Technology Investment, Global Brain, Atinum Investment, Hanwha Investment & Securities, HYBE, and others. According to CoinGecko data, Upbit's daily trading volume is about $1.2 billion. In September, the exchange received preliminary approval from the Monetary Authority of Singapore (MAS) for a major payment institution license. Reports indicate that Upbit has established compliant branches in Indonesia and Thailand. Upbit's success has provided it with more market control, which has also sparked strong dissatisfaction from other competitors.

Lee Kang-hee called on regulators to take measures to help domestic cryptocurrency exchanges in South Korea expand "overseas expansion channels" to enhance global competitiveness. He mentioned that the lack of effective connections with global exchanges has led to strict domestic regulations "hindering funds" from flowing in from overseas. He concluded, "Every year, trillions of won" flow from "domestic platforms" to overseas exchanges." But almost no funds flow in the opposite direction. This is a serious problem."

Regulators Expected to Launch Antitrust Investigation into Upbit

In response to Lee Kang-hee's concerns, Financial Services Commission Chairman Kim Byeong-hwan stated that the FSC will conduct a "detailed review" of K Bank's IPO application. Kim pointed out that the FSC has already recognized the potential monopoly issues with Upbit and will investigate this matter. He added, "We implemented the Electronic Financial Transactions Act on September 15 and will check the relevant situation after the system is implemented."

Additionally, Kim mentioned that the FSC plans to "investigate the monopoly structure of the cryptocurrency market" and Upbit's market position based on Lee Kang-hee's concerns.

So far, despite increasing reports about the investigation into Upbit, the exchange has not publicly responded to the matter. On October 10, Upbit Global notified users on the X platform that the trading platform would undergo planned server maintenance on October 14, during which cryptocurrency withdrawals and deposit services would be temporarily suspended.

This is not the first time South Korean lawmakers have accused Upbit of "monopoly." Just this July, other Democratic Party lawmakers also expressed concerns about Upbit's "potential monopoly status."

As the regulatory pressure stemming from the close relationship between Upbit and K Bank continues to escalate, South Korea's cryptocurrency market is facing certain challenges. Whether regulatory measures can effectively promote healthy market development has become an important issue that all participants must confront together.