[Virtual Asset Industry in Crisis ①] Domestic Market Dries Up as Global Expansion Accelerates

While Exchange Revenues Exceed 1 Trillion Won, Wallet Providers Earn Only 4.5 Billion Won
"Abnormally Skewed Market Structure"
"If Legislation Is Delayed, Overseas Virtual Asset Firms Will Preempt the Industry"

The domestic virtual asset industry is showing signs of decline due to regulatory gaps and uncertainty. Since the introduction of the reporting system under the Act on Reporting and Using Specified Financial Transaction Information (the "Special Act") in 2021, the number of businesses giving up on registration and operations has continued to increase, making the contraction of the ecosystem more visible. In contrast, the United States, European Union (EU), and Japan are accelerating the advancement of the industry by incorporating key areas such as stablecoins and tokenization into their regulatory frameworks.

According to the virtual asset industry on November 28, as of June 30, 2022, a total of 35 virtual asset businesses had registered under the Special Act, including 26 exchanges and 9 wallet and custody service providers. However, as of the first half of this year, the number had dropped to 25, consisting of 17 exchanges and 8 wallet and custody service providers. This means that over the past three years, about 10 businesses have given up on registration, ceased operations, or closed down.

Currently, the virtual asset business registration system excludes non-fungible token (NFT) trading, virtual asset deposits and lending, and decentralized finance (DeFi) services. The virtual asset industry expects that if businesses excluded from the reporting system are considered, the number of companies that have abandoned their operations would be even higher.

The performance of virtual asset exchanges and wallet and custody service providers reveals the abnormality of the market. In the first half of this year, the revenue of eight wallet and custody service providers was 4.5 billion won, a 53% decrease compared to the same period last year. Their operating loss was 11.8 billion won, with the loss increasing by 100 million won. In contrast, the performance of virtual asset exchanges remained solid. In the first half of this year, the 17 exchanges recorded 1.1487 trillion won in revenue and 615.8 billion won in operating profit.

Jung Gutae, CEO of Infinitblock, pointed out, "Although there is ample investment demand, technology, and talent, the incomplete regulatory framework and lack of policy direction have caused the industry structure to become abnormally skewed. As a result, the retail trading market centered on won-based exchanges has become excessively bloated, while core areas connecting to the real economy-such as custody, infrastructure, stablecoins, and real-world asset tokenization (RWA)-have effectively stagnated."

Hwang Seokjin, Professor at Dongguk University Graduate School of International Information Security, also commented, "While the domestic virtual asset industry appears vibrant on the surface, it is structurally in crisis. The market is active, but the absence of key regulations and delays in the second-phase legislation have made the industry's direction uncertain."

While the domestic market has been hampered by regulations such as the ban on initial coin offerings (ICO) implemented in September 2017, the global market has seen altcoins evolve toward practical, technology-driven use cases. Rather than being mere investment vehicles, they have expanded their roles as blockchain infrastructures with specific purposes. For example, Ripple (XRP) has specialized in international remittance and interbank payment networks, being used for actual transactions between financial institutions. Ethereum has established itself as a platform supporting the entire blockchain economy, including DeFi, NFTs, gaming, decentralized autonomous organizations (DAOs), and RWAs. Stablecoins are also rapidly expanding in the payments and remittance sectors, effectively emerging as virtual asset-based means of payment.

It's not just about ICOs. Custody service providers have already built technical infrastructure but remain constrained by the absence of government guidelines and legal restrictions. Moreover, domestic virtual asset businesses are focused solely on transaction fees. In the third quarter of this year, 97.94% of Upbit's revenue came from fees. In contrast, the fee ratio for Coinbase, a global exchange, was only 59%. While global virtual asset businesses are diversifying their operations, domestic companies remain limited to a narrow range of business activities.

The industry is currently focused on the second-phase virtual asset legislation. The second-phase legislation includes the establishment of a regulatory framework for stablecoins, strengthening entry and operational regulations for virtual asset businesses, and introducing disclosure and listing systems to enhance market transparency. Stablecoin issuers will be subject to a licensing system, mandatory management of reserve assets, and guarantees of user redemption rights. In addition, the scope of virtual asset business activities will be subdivided into areas such as advisory and evaluation services. The legislation is also expected to include rules for virtual asset listings and disclosure requirements at the level of capital markets. In short, the second-phase legislation will provide a regulatory environment that enables the industry to proactively pursue business opportunities.

Hwang Sewoon, a researcher at the Korea Capital Market Institute, stated, "It is necessary to expedite the passage of the legislation and the preparation of enforcement decrees. If the legal framework is delayed, overseas virtual asset companies may gain a first-mover advantage in the market," he explained.