[Twisting Bitcoin] Cryptocurrency Exchanges Choose Brinkmanship Ahead of Reporting Deadline Under the Special Financial Transactions Act...

Harsh Financial Regulators' Restrictions... Cryptocurrency Exchanges Inform Real-Name Account Issuance Only on the 24th
Remaining Risks... Investors Must Be Informed of Detailed Remaining Risks

Cryptocurrency is sweeping across the globe. It is even likened to a so-called ‘frenzy.’ However, the more intense the frenzy, the more necessary it is to pause and observe carefully. If problematic aspects are swept away along with the hype, they are bound to resurface as bigger issues someday. This is a time to calmly review the cryptocurrency market, in a segment called ‘Twisting Bitcoin.’

[Asia Economy Reporter Gong Byung-sun] On the 24th, the deadline for virtual asset service providers to register under the amended Act on Reporting and Using Specified Financial Transaction Information (the Specified Financial Transactions Act, or Specified Act) expired. Industry attention focused on which exchanges, besides the four major domestic cryptocurrency exchanges (Upbit, Bithumb, Coinone, and Korbit), would be able to obtain real-name bank accounts.

However, no exchanges other than the four major ones received real-name accounts. As a result, some exchanges began deciding to shut down or give up their Korean won markets. The financial authorities stipulated that exchanges without real-name accounts but only with Information Security Management System (ISMS) certification could operate only won markets. Consequently, among the 29 exchanges with ISMS certification, 25 switched to coin markets where cryptocurrencies can be traded for cryptocurrencies.

Opinions on the registration deadline set by the amended Specified Act are divided. Cryptocurrency exchanges argue that the conditions required by the financial authorities, such as obtaining real-name accounts and ISMS certification, were far from achievable. Nevertheless, the financial authorities stated that sufficient time was given and that they will continue to respond strictly.

So, what impact did the amended Specified Act have on the industry? And will future regulations take a similar form? It is necessary to review the situations leading up to the registration deadline under the amended Specified Act to prepare for possible future regulations.

Shutting Down Immediately When the Clock Strikes 12?

A unique aspect of this amended Specified Act is that once the deadline arrives, exchanges must either shut down immediately or operate coin markets. Of course, the financial authorities recommended that if exchanges close or switch to coin markets, they should operate dedicated channels for 30 days to allow withdrawal of deposits or cryptocurrencies. However, this is only a recommendation and not mandatory.

Professor Hong Ki-hoon of Hongik University’s Business Administration Department explained, “Typical regulations provide an exit period after the registration deadline for exchanges to close down. But in this amended Specified Act, issues kept arising during the registration period, leaving investors with little time to respond.”

In fact, after the amended Specified Act was enforced in March and six months passed, sudden switches to coin markets occurred frequently. Cryptocurrency exchanges such as Probit, Foblgate, and Cashierest closed their won markets and opened coin markets this month. Even Gopax switched to a coin market only as the deadline approached, and Huobi Korea stopped operating its won market on the same day.

There are criticisms that the six months given by the financial authorities was insufficient for exchanges to prepare. Professor Lee Byung-wook of Seoul School of Integrated Sciences and Technologies said, “Six months is a short time to obtain ISMS certification. From the exchanges’ perspective, it must have been difficult to meet the standards set by the financial authorities.”

Exchanges Choosing a Cliff-Edge Tactic

Facing harsh regulations, exchanges adopted a cliff-edge tactic. Gopax and Huobi Korea hinted at the possibility of obtaining real-name accounts by the registration deadline on the 24th. On the 8th, Gopax held a real-name account reservation event. From investors’ perspective, Gopax’s actions made it almost certain that real-name accounts would be issued. Huobi Korea also announced through a notice that the decision on real-name account issuance would be made on the 24th.

However, news of the failure to obtain real-name accounts from Gopax and Huobi Korea was only revealed on the 24th itself. The losses were borne by investors. The cryptocurrency Creditcoin, listed only on Gopax, plummeted more than 80% in a single day, showing a massive drop. The futures contract coin, which accounts for almost all trading on Huobi, also plunged 19.40% compared to the previous day and has continued to fall since the 24th.

An industry insider said, “Of course, this is related to the survival of the exchanges, but it also involved many investors and large sums of money. Emphasizing only the possibility of real-name account issuance without preparing for the worst-case scenario was somewhat irresponsible.” Professor Lee also explained, “If exchanges had even a slight suspicion that real-name account issuance might fail, it could be linked to moral hazard issues.”

Remaining Risks Ahead... Who Will Protect Investors?

As a result, there are criticisms that the amended Specified Act is not a well-crafted law. Professor Hong said, “When the amended Specified Act was first drafted, all administrative bodies should have participated, but that was insufficient. Predictions that exchanges would adopt cliff-edge tactics were made from the time the act was passed.”

The harsh regulations of the Specified Act and the cliff-edge tactics of exchanges may continue to cause harm to investors. Bithumb, Coinone, and Korbit have registered as virtual asset service providers with real-name accounts at the Financial Intelligence Unit (FIU), but there is still a possibility that their registrations may not be approved. If not approved, they must immediately cease operations. Unlike the small and medium-sized exchanges that disappeared earlier, these exchanges have operated won markets, so if their registration fails, the damage is expected to be greater. Nevertheless, these exchanges are not informing investors about such possibilities.

An industry insider pointed out, “Exchanges should fully inform and explain to investors about the possibility of registration rejection. They should not hold investors hostage as if standing on the edge of a cliff.”