We are not sure that it is the job of regulations in a nascent sector like digital assets to foster technological innovation. Rather, we think of regulation of digital assets as a way to establish rules of the road, so that cryptocurrencies be used optimally. If crypto is as utilitarian as its diehard proponents claim, then it should shine even if it is not being used primarily as an ultra -speculative and volatile asset or as a means of concealing and/or laundering illicit financial gains.
So how about the draft rules announced by the Financial Services Commission in July that will go into effect in July 2024? The rules will require companies to disclose if they own or hold crypto, while virtual asset service providers will be required to pay fees to customers for using their deposits. When exchanges store their assets in banks, the banks are allowed to invest the deposits in safe assets like government bonds. The rules also require exchanges to store 80% or more of customers' deposits in cold wallets, dedicated digital asset wallets that are not permanently online and thus less susceptible to hacking.
This is a good start, but we are concerned that the rules governing how crypto exchanges interact with banks are still too lax or poorly defined. Case in point: Korean media recently reported that a remarkable 70% of digital lender K Bank’s deposits are tied to cryptocurrency via the exchange Upbit. Since K Bank has about 15 trillion won (US$11.5 billion) in deposits, that means more than US$8 billion of the total is linked to crypto. We are not aware of any specific rules that protect customer deposits in the event of certain crises, for instance, a run on Upbit, or a serious hack. Upbit has not suffered a serious security breach since 2019 when it lost about US$49 million, but one wonders how long its luck can hold. Upbit reportedly has suffered an exponential increase in hacking attempts over the past three years.
We also note that if not for its relationship with Upbit, K Bank might be in considerably worse financial condition – as was the case in its initial years of operation. How wise is it to build a bank on a foundation of cryptocurrency deposits?
Yet another are of concern are the massive crypto holdings by South Koreans overseas. South Korean investors and corporations hold over 131 trillion Korean won (US$97.9 billion) worth of cryptocurrencies in overseas accounts, South Korea’s National Tax Service said in November. The figure is 70% of the total reported financial assets held by South Koreans overseas.