Korea spent seven years pulling crypto trading inside the regulatory fence
From the real-name account rule of 2018 to the user protection act that took effect in July 2024, Korea built a perimeter around a very large retail market without deciding what it wanted the market to become.
Korean retail participation in cryptocurrency trading is high by any comparison. The Financial Services Commission’s semi-annual surveys of domestic exchanges reported registered users numbering in the millions through 2023 and rising further in 2024, in a country of roughly 51 million people, and won-denominated trading volumes have at times been of a scale comparable to turnover on the domestic equity market. Whatever one’s view of the asset class, the policy problem this creates is unavoidable: a very large number of ordinary households hold something, and the government must decide what protecting them means.
The market’s most quoted feature is a symptom of the fence rather than of enthusiasm. The “kimchi premium” — the tendency of prices on Korean exchanges to sit above global reference prices, at times by double digits in percentage terms, notably during the early 2018 and April 2021 episodes — persists because the arbitrage that would erase it is obstructed. Moving won abroad to buy an asset cheaply and bringing it back is difficult at scale under Korea’s foreign-exchange reporting rules and banking practice. A price gap that survives is a measurement of a wall.
The first wall went up in January 2018, when the authorities required that trading be conducted through a real-name bank account matched to the trader’s identity at a bank partnered with the exchange. Anonymous accounts ended overnight. So, in effect, did most of the industry’s long tail: only exchanges that could persuade a bank to enter a partnership could offer won deposits at all, which concentrated the market into a handful of venues and made banks unelected gatekeepers of who could operate.
The second came in 2021, with the amended Act on Reporting and Use of Specific Financial Transaction Information. Virtual asset service providers were brought under anti-money-laundering supervision and required to register with the Financial Intelligence Unit, hold an information security management certification and maintain real-name accounts. Dozens of small exchanges closed rather than comply or failed to qualify. In March 2022 a travel rule took effect, obliging identifying information to accompany transfers above one million won — the standard the Financial Action Task Force had recommended, implemented earlier and more literally than in most member jurisdictions.
The collapse in May 2022 of a large algorithmic stablecoin project founded by a Korean entrepreneur, which erased tens of billions of dollars of nominal value and affected Korean holders directly, converted a technical regulatory agenda into a political one. Prosecutors opened cases; the National Assembly, which had been debating a comprehensive framework without urgency, acquired some.
The result was the Virtual Asset User Protection Act, effective from 19 July 2024. It requires exchanges to hold customer deposits separately at a bank and pay interest on them, to keep a portion of customer assets in cold storage and carry insurance or reserves against hacking, and it prohibits market manipulation, the use of undisclosed material information and other unfair trading practices, with criminal penalties and supervisory authority for the Financial Supervisory Service. In substance it imported the securities market’s abuse rules and the custody rules of a deposit-taking institution, without classifying the assets as either. It was explicitly a first stage; issuance, disclosure obligations and the treatment of stablecoins were left to later legislation.
What the seven years produced is a market that is unusually safe at the custody layer and unusually undeveloped above it. Real-name accounts have in practice been available only to individuals, which has kept corporate and institutional participation largely out; regulators have taken the view that domestic brokerage of foreign spot crypto exchange-traded funds sits uncomfortably with the Capital Markets Act. Korea therefore has one of the world’s largest retail crypto markets and almost none of the institutional apparatus that normally accompanies one. That is a coherent position, and it is a choice rather than an oversight — the premium on the screen is simply the price of it, quoted continuously.