Upbit Faces Regulatory Scrutiny Over Market Monopoly Concerns as South Korea Preps for 19 July

New Virtual Asset User Protection Act in South Korea on July 19

South Korea is on the brink of enforcing its groundbreaking Virtual Asset User Protection Act, slated to take effect on July 19, 2024.

This legislation marks a pivotal moment in the country's regulatory landscape, aiming to safeguard virtual asset users and establish robust transactional integrity in the burgeoning crypto market.

Under this new law, virtual asset service providers (VASPs) are mandated to meticulously monitor and report abnormal transactions.

Such vigilance includes promptly notifying financial authorities of suspicious activities like significant price fluctuations or irregular trading volumes, thereby fortifying investor protection measures.

To comply with these stringent requirements, VASPs must maintain comprehensive records of transactions, encompassing details such as asset names, transaction dates, quantities, and crucially, order book information at the time of transaction initiation.

These records serve as vital evidence for regulatory scrutiny, enabling authorities to ascertain the fairness and legality of market practices.

Exchanges Scramble to Meet Compliance Standards

In anticipation of the new law, cryptocurrency exchanges in South Korea are racing to implement stricter monitoring measures to detect and prevent unfair trading practices.

The Digital Asset Exchange Alliance, a group comprising the five largest domestic crypto exchanges, has introduced a guideline urging exchanges to actively monitor for abnormal transactions.

Leaders from Korea's top crypto exchanges gather at Coinone's Seoul headquarters for the launch of their joint consultative body. Pictured (left to right): Bithumb's CEO Lee Jae-won, Coinone's CEO Cha Myung-hun, Gopax's CEO Lee Jun-hang, Korbit's Chief Strategy Officer Kim Jae-hong, and Dunamu's CEO Lee Sirgoo. (Source: The Korean Times)

This includes unusual fluctuations in prices or trading volumes of listed digital tokens.

Additionally, the alliance has revised its internal control standards, requiring exchanges to report suspicious activity to financial regulators and take steps to safeguard users.

Bithumb Establishes Monitoring Committee

Bithumb, the operator of South Korea's second-largest cryptocurrency exchange, has taken a proactive approach by establishing a dedicated monitoring committee.

This committee, headed by Bithumb CEO Lee Jae-won, will be responsible for overseeing market activity and addressing abnormal transactions and unfair trading practices on a year-round basis.

Bithumb has also bolstered its compliance efforts by creating additional committees to supervise user protection, prevent money laundering, and ensure internal controls are upheld.

Furthermore, the exchange introduced a reward program earlier this month, offering up to 300 million won (approximately $220,000) to individuals who report on employees engaging in unfair trading activities.

Proposed Delay of Crypto Trading Tax by South Korean Lawmakers

In a move stirring debate, lawmakers from South Korea’s ruling People Power Party have proposed postponing the imposition of a 20% tax on crypto trading profits until 2028.

This proposal comes amidst concerns that an immediate tax implementation could deter investment in the crypto sector, already navigating through economic uncertainties and market volatility.

Under the proposed tax rules, investors would only be liable for the 20% tax on annual gains exceeding 2.5 million South Korean Won (approximately $1,800).

This stark contrast to the capital gains tax thresholds for traditional stock trading—where taxes apply only to profits exceeding 50 million Won (about $36,000)—has drawn criticism and sparked a broader discourse on equitable taxation policies.

Upbit Already Ahead of the Curve

Dunamu, the operator of South Korea's largest cryptocurrency exchange, Upbit, has also been busy strengthening its internal controls in recent months.

Upbit was the first local exchange to implement a system that tracks asking prices for trades, along with the launch of a separate team dedicated to monitoring activity.

This system, established in the first half of 2024, goes beyond the requirements of the new law, demonstrating Upbit's commitment to user protection and market stability.

The exchange has also maintained a committee tasked with screening abnormal transactions since August 2023.

Scrutiny on Upbit and K Bank: Allegations of Market Monopoly

While South Korea implements stricter regulations for the cryptocurrency industry, lawmakers are also looking into potential market monopolies.

South Korean crypto exchange Upbit, in tandem with its banking partner K Bank, finds itself under regulatory scrutiny amid allegations of market monopolisation.

An office of K Bank in Seoul, South Korea (Source: Korea Business News/YouTube)

Upbit commands a substantial 60% share of the country's crypto trading volumes, a decline from its previous dominance exceeding 80%.

K Bank's exclusive partnership with Upbit further consolidates its position in the crypto banking sector, underscoring concerns over concentrated market power.

Lawmakers, notably MP Min Byeong-deok, have voiced apprehensions about transparency in Upbit's token delisting procedures and called for regulatory reforms to enhance market competition and investor protection.

The Fair Trade Commission (FTC) guidelines classify entities with market shares exceeding 50% as monopolies, prompting regulatory scrutiny into Upbit's market dominance and its implications for fair market practices.

Upbit Defends Its Position

Upbit and Dunamu have faced scrutiny regarding their market share before.

In 2022, lawmakers and the Fair Trade Commission (FTC) investigated Upbit over similar concerns. The FTC classifies any company with a market share exceeding 50% as a potential monopoly, and Upbit falls squarely within that category.

Dunamu maintains that it offers a safe and secure trading platform for investors and emphasises its commitment to fair competition and market transparency.

Lawmaker Seeks Solutions to Address Potential Monopoly

Lawmaker Min has a history of criticising Upbit, previously taking aim at what he called "opaque" token delisting procedures.

He is currently seeking expert opinions to determine if revisions to VAUPA are necessary.

One potential solution being floated involves mandating exchanges to notify customers about listing schedule changes at least a month in advance.

Min has also expressed a commitment to "upgrading" the domestic crypto market, including supporting the approval of spot Bitcoin ETFs.

Fostering a Competitive Crypto Landscape in South Korea

South Korea's robust regulatory framework for virtual assets presents a fascinating interplay between investor protection, market stability, and fostering healthy competition.

While Upbit's market dominance necessitates close regulatory scrutiny to prevent monopoly, the resulting environment could pave the way for a dynamic and competitive crypto landscape in South Korea.

This, in turn, could benefit investors through a wider range of services and potentially lower fees, while also creating a breeding ground for innovation within the domestic crypto industry.