Why is the bitcoin trading volume of Korean first-tier exchanges difficult to recover?

Source: LongHash

As the country with the third-largest crypto exchange in daily trading volume (after the United States and Japan), Korea's cryptographic trading activity has declined sharply since 2018.

In December 2017, when South Korea's demand for cryptocurrency reached a new high, the so-called “Kimchi Premium” appeared even as investors' funds rushed into the asset class. The premium of Bitcoin in the Korean market soared to 54%.

Since then, the South Korean government has issued two major policies, including prohibiting foreigners from trading cryptocurrencies in Korea and requiring the exchange to enforce strict KYC processes, which has stabilized the Korean market again.

However, nowadays, the daily trading volume of several of the largest crypto exchanges in Korea has dropped significantly. This situation indicates that the currency price is sluggish, market demand has stagnated, and people's overall interest in the asset class is not high. For example, since October 2018, the daily trading volume of Bithumb (and UPbit), Korea's largest cryptocurrency trading platform, has fallen by 83%, from 1.2 million BTC to 200,000 BTC.

Of course, this decline is not just a phenomenon unique to South Korea. In major exchanges, including Coinbase, BitMEX and Bitfinex, the price of Bitcoin fell by about 55% from its highest point of $1,961, while other major altcoins, including Ethereum and XRP, have fallen. 85% to 97%.

The reason behind the decline in the trading volume of the Korean Bitcoin exchange

The main reason for the decline in bitcoin and other cryptocurrency transactions on the three major exchanges in Korea seems to be: the cryptocurrency trading regulatory framework is ambiguous, the sudden plunge in bitcoin prices in January 2018, and the sharp fall in the price of the altcoin.

At the peak of the bull market, South Korea’s middle class was caught in a frenzied investment sentiment. For some millennials and many middle-class investors, cryptocurrency is the hope of another rich overnight after the country’s real estate boom. When the market entered the downtrend channel, ordinary people suffered huge losses after investing in cryptocurrencies including Bitcoin.

The confusing official position of the South Korean government certainly does not help. In January 2018, former Justice Minister Park Sung-chi said that it would ban domestic transactions in cryptocurrency exchanges.

Park Sang-ki said:

“People are very worried about virtual currency, and basically the Ministry of Justice is working on a bill to ban cryptocurrency transactions through exchanges.”

The South Korean Finance Minister subsequently said that there would be no such ban, and said that South Korea is gradually moving in the direction of regulating the field and legalizing cryptocurrency exchanges, making investors confused about the official position of the government.

However, the decline in volume is also partly related to disputes at the exchange level. Although Bithumb and UPbit are both Korea's largest cryptocurrency trading platforms, with a large volume of transactions, UPbit has been able to continue to serve a wider range of investors and traders by supporting most banks in Korea.

In contrast, Bithumb has established a strategic partnership with a large bank called the Nonghyup Bank, which only supports the Korean won deposits and withdrawals executed by the Agricultural Cooperative Bank.

In theory, because UPbit supports major banks in Korea, its volume should be much larger than Bithumb. This has been obvious in the past six months. From February to August this year, UPbit's trading volume exceeded Bithumb, especially in the three months from April to July, when Bitcoin's price hit an annual high of just under $14,000.

The sudden drop in UPbit trading volume in the second half of 2018 appears to be due to the investigation of the company's alleged fraudulent transactions and money laundering by the Office of the Prosecutor. In May 2018, the South Korean Prosecutor's Office launched a surprise investigation based on a series of allegations. At the end of 2018, UPbit's trading activity fell by nearly 80%.

In December, the Office of the Prosecutor filed a lawsuit against four former stakeholders on the exchange, ending the investigation of the company to a certain extent. Since then, UPbit's performance has gradually rebounded.

In December 2018, the UPbit team stated:

“This investigation was related to certain transactions during the three months from September 24 to December 31 (open service date: October 24). At that time our company was preparing and just launched the Upbit service. All there Transactions that occurred on the Upbit exchange after the period were not related to this investigation.

After eight months of investigation, our company has made a sincere explanation to the prosecutor's office on this case. Upbit does not conduct money laundering (internal hedges), fictitious orders (liquidity supply) or fraudulent transactions. The company did not trade in non-company cryptocurrencies, nor did it allow employees to benefit from such transactions.

UPbit is operated by Dunamu, which has close ties with Kakao because it operates KakaoStock, which maintains its position as the first-line exchange in the country. Prosecutors' high-profile UPbit investigations are likely to be a fuel-burning agent that causes local investors to lose confidence in the infrastructure supporting the asset class at the start of the survey.

Can the transaction volume be restored?

Since 2018, with the support of some of the country's largest banks, a new wave of cryptocurrency exchanges has emerged in South Korea. For example, Gopax is supported by Shinhan Bank, the country's second-largest commercial bank, and provides almost immediate cash withdrawal services to account holders at Shinhan Bank.

As the infrastructure of cryptocurrency exchanges improves and the transparency of banking services increases, investor confidence may gradually recover over the long term.

After the G7 Group and the Financial Action Task Force (FATF) issued guidelines successively, South Korea has also been working hard to establish a clearer framework for cryptocurrency exchanges and investors to create a more stable environment for enterprises.

South Korean financial authorities have chosen to comply with FATF guidelines and require regulated cryptocurrency exchanges to comply with the requirements of the G7 Group's financial regulators.

Two of the many requests that FATF has made to companies that are considered “virtual asset service providers” are the termination of anonymous cryptocurrency transactions and the implementation of a more rigorous KYC system to prevent money laundering.

The FATF states:

“The FATF recognizes the need to appropriately mitigate the risk of money laundering and terrorist financing associated with virtual asset activities and has therefore developed more detailed operational requirements to effectively monitor virtual asset service providers.”

South Korea's major cryptocurrency exchanges, including Bithumb, UPbit and Korbit, have largely followed the guidelines set at the February 2019 FATF plenary meeting.

In September 2019, UPbit stated that it had terminated the privacy-focused cryptocurrency transaction in order to comply with the FATF guidelines. Korbit also banned Monero and other anonymous cryptocurrency transactions, but Monero also has a Korean won pair on Bithumb.

Korean Exchange's territory will change

Bithumb also encountered a problem. According to local reports, Bithumb may undergo restructuring with another acquisition of its former co-CEO, as the BXA consortium encountered obstacles to the acquisition of Bithumb.

ZDNet Korea reported that in October 2018, the BXA consortium agreed to acquire a 51% stake in BTC Holding Company (Bithumb) for a valuation of $345 million. The BXA consortium paid approximately $112 million out of $345 million and delayed the payment of the remaining amount until September 30. However, the company failed to complete the transaction by the agreed date. If Bitumum's former co-CEO Kim Jae-wook completes the pending deal, his company Vidente will hold a 32.74% stake in Bitmumb and become the largest shareholder.

This means that given the series of unexpected events that Bithumb and UPbit have experienced, such as the acquisition of Bithumb and BXA Consortium, which was difficult to complete and the survey that UPbit experienced last year, although the two exchanges still dominate, other transactions It also has the opportunity to compete for the top spot in the Korean crypto exchange market.

South Korea may still be a major cryptocurrency exchange market

According to data released by Coinhills , the Korean won ranked third in terms of national currency transactions in Bitcoin, accounting for 3.05% of the global bitcoin market.

With the government's efforts to establish a clear regulatory framework, with the support of regional governments, the Korean cryptocurrency market is likely to expand in the next few years.

Busan, a city in South Korea, and the Jeju Special Self-Governing Province have established special economic zones for blockchains and companies associated with cryptocurrencies to develop the local cryptocurrency industry.

Therefore, despite the significant decline in the daily trading volume of cryptocurrency in Korea's first-tier exchanges, with the support of the government, South Korea's cryptocurrency market may still maintain its core position in the Asian market.

LongHash , read the blockchain with data.