The Financial Services Commission has told the National Assembly that it is too early to let a single cryptocurrency exchange sign real-name account agreements with multiple banks. The regulator said the effect of multiple bank partnerships on anti-money laundering efforts has not been sufficiently verified, and that any easing should be weighed only after the Digital Asset Basic Act, known as the second-phase law, takes effect. Market participants, however, argue the rule should be lifted as soon as possible because the one-exchange-one-bank structure causes significant inconvenience for customers.
According to financial industry sources on the 27th, the chief expert advisers' office of the National Assembly's National Policy Committee submitted a bill review report containing these views to a full committee meeting held the previous day.
In the report, the FSC said of scrapping the one-exchange-one-bank framework that "the effects of the current framework on money laundering using cryptocurrency and on the market structure of cryptocurrency exchanges have not been sufficiently confirmed." It stressed in particular that, with the second-phase crypto law now being drafted, there is a need to verify whether exchanges have built sufficient independent anti-money laundering capabilities after the law is enacted and takes effect.
The second-phase law is expected to strengthen oversight by shifting entry rules for exchanges from the current registration system to a licensing system. The FSC's position is read as an intention to screen out unqualified operators through licensing and put a regulatory framework for exchanges in place before considering whether to allow partnerships with multiple banks.
Within the government, there is considerable concern that allowing multiple bank partnerships would scatter transaction information across several banks and raise money laundering risks. At present, a single partner bank collects the financial transactions and customer information of a given exchange's users and closely monitors the flow of won deposits and withdrawals.
If the number of partner banks increases, however, information on funds moving through a single exchange would be dispersed, making it harder for individual banks to grasp the overall flow. Once corporate participation in the cryptocurrency market is fully permitted, transaction volumes are expected to grow and fund flows to become more complex. The Korea Institute of Finance recently pointed out the possibility that exchanges could choose to partner with banks that have relatively loose anti-money laundering standards, lowering the level of oversight across the industry.
The FSC is also concerned that allowing multiple banks could deepen the concentration of market power among a few exchanges. If banks come to prefer partnerships with large exchanges that have high trading volumes and broad customer bases, those large exchanges would secure additional customers from several banks. Smaller exchanges, by contrast, would be unable to add partner banks, potentially widening the gap.
Concentration in the domestic won-trading market is severe. Based on average daily trading value in July, market shares among the country's five largest exchanges were 68.1% for Upbit and 26.9% for Bithumb. The two exchanges alone account for 95%. Coinone had about 4%, Digital X 1% and Gopax 0.1%.
The one-exchange-one-bank framework is a "shadow regulation" with no legal basis. After the real-name deposit and withdrawal account system took effect in 2018, the practice of each exchange contracting with only one bank became entrenched as authorities and banks managed exchanges' money laundering risks. Currently, Upbit has real-name account agreements with K Bank, Bithumb with KB Kookmin Bank, Coinone with KakaoBank, Digital X with Shinhan Bank and Gopax with The Jeonbuk Bank.
The industry argues that the one-exchange-one-bank principle should be resolved in some form, because it restricts customers' freedom to choose a financial institution. Industry officials say no other country imposes such a restriction. Rep. Kim Sung-won of the People Power Party has already introduced a bill to amend the Act on Reporting and Using Specified Financial Transaction Information to permit one exchange to work with multiple banks, so related discussions are expected to follow.
The market also appears to be anticipating a multiple-bank framework. Banks and exchanges are said to have maintained behind-the-scenes contacts in preparation for a possible easing of the rule. Potential pairings discussed in the industry include Upbit with Hana Bank, Bithumb with KakaoBank and Toss Bank, and Gopax with Woori Bank. An official in the financial industry said that "for financial authorities looking into the oligopoly problem among exchanges, the first judgment must be whether multiple banks would promote competition or instead reinforce the oligopoly," while adding that "one-exchange-one-bank does restrict customers' right to choose."
