Bank of Korea and financial regulator in turf war over crypto

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South Korea is prepar­ing reg­u­la­tions for dig­i­tal assets, includ­ing cryp­tocur­ren­cy trad­ing, which will set the country’s frame­work for super­vis­ing the devel­op­ing and often volatile indus­try. But behind the scenes is a fight for pow­er between the finan­cial authorities. 

The Finan­cial Ser­vices Com­mis­sion, the finan­cial reg­u­la­tor known as the FSC, over­sees the local cryp­tocur­ren­cy mar­ket and indus­try, but the cen­tral bank last month said it wants the author­i­ty to demand access to data at cryp­tocur­ren­cy platforms. 

The squab­ble sur­faced again on April 25 when bank and FSC rep­re­sen­ta­tives and law­mak­ers met at the Nation­al Assem­bly to dis­cuss the cryp­tocur­ren­cy reg­u­la­tion bill, accord­ing to the offi­cial tran­script of the meet­ing. FSC vice chair­man Kim So-young said at the meet­ing the cen­tral bank’s right to data should not include cryp­tocur­ren­cies, argu­ing that the tokens are cur­rent­ly not wide­ly used for payments.

Bank of Korea Deputy Gov­er­nor Lee Jong-rye­ol was also at the meet­ing and disagreed.

“Due to the sig­nif­i­cant impact of the cryp­tocur­ren­cy mar­ket on the finan­cial sys­tem, it is nec­es­sary to require cryp­tocur­ren­cy oper­a­tors to sub­mit doc­u­ments to iden­ti­fy the impact on the con­duct of mon­e­tary and cred­it pol­i­cy, finan­cial sta­bil­i­ty, and the pay­ment and set­tle­ment sys­tem,” he said. 

The FSC final­ly agreed to the cen­tral bank’s request for it to have access to data from cryp­to com­pa­nies writ­ten into the upcom­ing leg­is­la­tion, say­ing it wants to accel­er­ate the process for build­ing a legal frame­work for cryp­tocur­ren­cies. How­ev­er, the dis­pute may well re-appear, said cryp­to indus­try officials.

See relat­ed arti­cle: Gold­man Sachs, Microsoft, Moody’s, oth­ers to join new finan­cial indus­try blockchain

Big market

The cen­tral bank may have a point, accord­ing to data in a March 2023 report by Sta­tista

South Korea has seen suc­ces­sive waves of what the report calls “cryp­tocur­ren­cy fever,” adding that around 10% of South Korea’s pop­u­la­tion of about 52 mil­lion peo­ple were invest­ed in cryp­tocur­ren­cies when Bit­coin hit a record high in 2021. 

The coun­try is one of the world’s biggest cryp­tocur­ren­cy mar­kets, accord­ing to the Sta­tista report, which said the country’s exchanges account­ed for more than 9% of glob­al cryp­to trad­ing vol­ume in August 2021.

Fur­ther, on May 19, 2021, the dai­ly trad­ing vol­ume of cryp­tocur­ren­cies on South Kore­an exchanges reached 23.7 tril­lion South Kore­an won (US$17.7 bil­lion) or more than the val­ue of equi­ties trad­ed on the country’s stock mar­ket, accord­ing to the report. 

While cryp­to prices fell sharply in 2022 amid a series of project fail­ures – includ­ing the US$40 bil­lion col­lapse of the South Kore­an Ter­ra-Luna sta­ble­coin fol­lowed by the FTX exchange – the cen­tral bank is con­cerned about the future. 

“The Bank of Korea wants to mon­i­tor any instances where a cryp­tocur­ren­cy com­pa­ny could under­mine the sta­bil­i­ty of pay­ment or finan­cial sys­tems,” said Park Sun-young, pro­fes­sor of eco­nom­ics at Seoul-based Dong­guk Uni­ver­si­ty via email on Wednesday. 

The cen­tral bank also rea­soned in an April report that sta­ble­coins, a type of cryp­tocur­ren­cy with a val­ue fixed to anoth­er asset, can be used as a sub­sti­tute for fiat cur­ren­cy and hence influ­ence mon­e­tary stability.

Welcome

South Korea’s dig­i­tal asset indus­try is broad­ly wel­com­ing of the nation­al ini­tia­tive to bring reg­u­la­to­ry clar­i­ty to the cryp­to indus­try, but is con­cerned clar­i­ty could suf­fer if finan­cial author­i­ties are them­selves involved in dis­putes over who is in charge. 

“The exist­ing super­vi­sion [by the FSC] is suf­fi­cient for the indus­try, so when the Bank of Korea becomes anoth­er moth­er-in-law for the cryp­to sec­tor, the indus­try may get over­whelmed [by reg­u­la­tions],” Kim Hyoung-joong, pres­i­dent of the Korea Fin­tech Soci­ety said in an email response to questions.

South Korea’s Demo­c­ra­t­ic Par­ty law­mak­er Kim Han-gyu was present at the Nation­al Assem­bly meet­ing in sup­port of the cen­tral bank. 

Accord­ing to local news out­let Seoul Eco­nom­ic Dai­ly, Kim said the cryp­to mar­ket con­tributes to an increase in house­hold debt, say­ing that more than 60% of total loans from South Korea’s online K‑Bank in the last two years were made to users of its part­ner Upbit, South Korea’s largest cryp­to exchange.

Upbit part­nered with K‑Bank in 2020 as laws man­dat­ed that every exchange should have local banks pro­vide users’ real-name deposit and with­draw­al accounts for anti-mon­ey laun­der­ing pur­pos­es. Upbit users bor­rowed 4.9 tril­lion Kore­an won (US$3.7 bil­lion) from K‑Bank from July 2020 to the end of last year, accord­ing to law­mak­er Kim. 

See relat­ed arti­cle: South Korea’s cryp­tocur­ren­cy bill gets nod in first phase of review, may pass this year

Struggle

How­ev­er, while the FSC gave some ground to the Bank of Korea in the shap­ing of the new law, con­cerns remain about the demar­ca­tion between the two authorities. 

Rul­ing Peo­ple Pow­er Par­ty mem­ber Yoon Han-hong said in the assem­bly meet­ing that hav­ing the cen­tral bank involved in super­vi­sion of cryp­to com­pa­nies can leave the false impres­sion that the coun­try acknowl­edges cryp­to as a pay­ment measure.

The pow­er strug­gle between the two will like­ly con­tin­ue, said Kim at the Korea Fin­tech Soci­ety. “The two might col­lide again when devel­op­ing the enforce­ment decree that comes after com­plet­ing the law,” he said.

But there is an upside to hav­ing the cen­tral bank more involved in set­ting cryp­to reg­u­la­tions, added Kim, say­ing this could be a pos­i­tive for devel­op­ing use of sta­ble­coins or cryp­tocur­ren­cies in pay­ment systems.

South Korea plans to com­plete its cryp­to reg­u­la­to­ry frame­work in two parts — the first has an empha­sis on con­sumer pro­tec­tion and leg­is­la­tors are to pass the first bill into law with­in the first half of 2023.

The sec­ond part focus­es on stan­dard­iz­ing the issue of cryp­to tokens and dis­clo­sure of infor­ma­tion to investors. The ulti­mate goal, accord­ing to law­mak­ers, is to build a trans­par­ent, even play­ing field for the cryp­tocur­ren­cy indus­try in South Korea.

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