- Korean crypto has emerged as a global force over the past year
- The nation’s chaebols , its giant conglomerates have funded digital-currency ventures and fostered their growth
- An upstart, Gopax, shows the power of a strong banking relationship in making crypto more secure and accessible
The last year has been a watershed for South Korea’s crypto market as the nation’s giant conglomerates from finance, technology, and telecom have come to dominate the sector. The presence of the behemoths has led to big changes in how business is conducted on the exchanges and also ushered in an era of government regulation. But while that sounds like upheaval, in South Korea it’s more like business as usual and the result is a nation poised to be a global leader in crypto. But how did it all come together?
BUSINESS, THE KOREAN WAY
In South Korea, chaebols — conglomerates operated by wealthy, powerful families — control a large part of the country’s economy. Samsung is perhaps the most familiar example of a corporation run by a family, but with a global presence.
But while Samsung is the best known, it’s hardly the only business giant in South Korea. And several of the others have been making noise in digital currencies over the past 12 months. Among the entrants in the crypto market: SKT, the country’s largest telecommunications company; Nexon/NXC, a $10 billion gaming giant; Hyundai, the global car manufacturer; LG, Samsung’s big rival in electronics; and Shinhan Bank, a major commercial financial institution.The end result is that as of November, all top five cryptocurrency trading platforms in the local market are controlled by conglomerates.
To understand which firms are related, it helps to break down the leading players and their relationship to the chaebols:
- Bithumb : The largest digital-asset trading firm in South Korea. Operated by BK Global Consortium, a leading plastic-surgery firm.
- Upbit : Operated by Dunamu, which itself is a subsidiary of internet giant Kakao, best known for the social app KakaoTalk.
- Korbit : Backed by Nexon/NXC and SK Telecom. Nexon bought a controlling interest last year for $80 million.
- Coinone : With backing from Yellow Mobile, with interests in mobile commerce, media, et al., and Daily Finance
- Gopax : The newest of the top five, with major funding from Shinhan Bank, Digital Currency Group
2018: A MILESTONE YEAR FOR KOREAN CRYPTO EXCHANGES SEES THE ENTRANCE OF GOPAX-SHINHAN
In early 2018, a new cryptocurrency exchange called Gopax entered the local market with significant hype, mostly due to the backing of Shinhan Bank — the country’s second largest commercial bank. Shinhan has assets of 430 trillion won (about $375B U.S. dollars). In terms of security, structure, and efficiency, Gopax represents something of an idealized exchange as envisioned by South Korea’s government.
While other exchanges had initially struggled to secure contracts with major banks, the involvement of Shinhan in the creation of a new cryptocurrency exchange meant that stability would come early to Gopax. Indeed, Shinhan Bank is something of an early adopter of the technology, having already initiated the process of developing cryptocurrency wallets and conducting pilot tests of various blockchain networks, including Ripple.
Gopax launched with a $22 million funding round, led by Shinhan, with additional funds provided by Digital Currency Group, Fenbushi Capital, TIPS, and Bluepoint. By rapidly matching much of the functionality and trust of Upbit, Gopax has been able to create a secure, efficient, and regulatory-compliant exchange in the local market. And thanks to the Shinhan relationship, it can process deposits and withdrawals quickly to an unprecedented 44 banks in the country. And when withdrawals are made from Gopax to Shinhan Bank accounts, the transfers are instantaneous, settling as soon as the investor on Gopax approves the transaction.
Screenshot of Gopax deposit / withdrawal section, with some of the 44 banks you can connect to
But it’s not only the breadth of those banking relationships that sets Gopax apart but also the speed. On the exchange, verified users are able to withdraw up to $1 million a day and funds transfers to Shinhan Bank are processed within seconds from the virtual bank accounts deployed on the exchange. Despite their early lead in South Korea, Bithumb and Upbit have thus far failed to match Gopax’s near-instant transactions into and out of financial institutions despite having achieved similar access to the nation’s financial system (more on this below).
THE SAILING HASN’T ALWAYS BEEN SMOOTH: BITHUMB’S $40M HACK JUST ONE OF MANY
South Korea’s rise as a leading crypto market hasn’t been easy. Trust was eroded following multiple high-profile security breaches. This has tempered enthusiasm for the crypto platforms and led to cautious investors. Market-leader Bithumb — the largest cryptocurrency exchange based on daily trading volume as measured by the Blockchain Transparency Institute — was heavily criticized for its inability to deal with and prevent security breaches.
In mid-2018, Bithumb suffered back-to-back hacks, one of which led to the loss of more than $40 million user funds. Bithumb was hit in July of this year by what’s called an advanced persistent threat (APT) attack. But it wasn’t the first time: The exchange had been victimized by the same simple method in mid-2017. That earlier hack led to a government warning to Bithumb for implementing poor security measures, And yet a year later, the exchange fell victim to an almost identical attack.
SK, South Korea’s telecom giant and an investor in Bithumb competitor Korbit, reported that the exchange was infiltrated by hackers that gained access to employee computers or the internal system of the exchange. SK information security director Lee Jae-woo said: “The Bithumb crypto exchange hack is currently being investigated by local financial authorities and the exact reason for the hack has not been revealed by investigators. But here at SK Infosec, we suspect that the exchange hack was highly likely caused by an APT attack, either by … infiltrating into the computers of employees or the internal system of the exchange.”
And Bithumb wasn’t alone in falling prey to hackers. In the past year, both large and small cryptocurrency exchanges in the local market, including Youbit and Coinrail, were hacked.
The Korea Internet & Security Agency, led by Kim Jeong-sam, an information-protection officer at the agency, initiated an official investigation into all local exchanges as a response, as investors expressed concerns over the lack of security measures employed by exchange operators. Officer Kim was quite critical in August, saying the majority of digital-asset trading platforms aren’t doing enough.
“There still exists many cryptocurrency exchanges with subpar security systems and as such, investors are cautioned in investing through unrecognized platforms. The government will continue to monitor and evaluate cryptocurrency exchanges to improve the standard of security employed by trading platforms,” Kim said.
Kim’s agency also discovered that while the country’s major exchanges including Korbit, Bithumb, and Upbit have indeed improved security measures, the vast majority of smaller trading platforms still need significant improvements to become fully secure.
IMPACT OF SHINHAN BANK ON SOUTH KOREA’S CRYPTO MARKET
Oftentimes, it takes a new entrant to shake up a market, and South Korea in 2018 was no exception. Gopax burst on the scene with a powerful banking partner and an advanced platform, hoping to take on Bithumb, Korbit, and the other leaders. Gopax bet that investing in technology and working with leading players in financial services would give it a chance to set itself apart in the crowded market.
A critical first step was to avoid the kind of security breaches that had hit rival. Gopax brought in a high profile cybersecurity expert from the National Police Agency of South Korea to prevent security breaches and suspicious activities. Next up, ensure a state-of-the-art trading platform. To get there, Gopax invested in technology from Nasdaq and derivatives giant CME Group. The result is a state-of-the-art order matching system utilized by some of the largest stock markets in the world. The platform thus far has avoided server downtime and technical issues.
Security has held up so far as well. As with all exchanges, Gopax is attacked regularly and has yet to be hacked. Lee Jun-haeng, CEO of Streami, the parent company of the exchange, said that the establishment of a strong team of cybersecurity experts allowed the exchange to maintain strict security protocols. Lee added that the institutional and venture capital investors in Gopax be on the exchange because of this mission: to be a secure and efficient platform for South Korean investors. But the influence of Gopax is also very much of a function of its banking partner.
Shinhan Bank has also played a vital role in convincing many South Koreans that the cryptocurrency sector is legitimate and blockchain technology is a core pillar of the so-called fourth industrial revolution. The recognition of the potential of digital assets by a major commercial bank had led many investors in the local market to develop an awareness of cryptocurrencies and actual use cases of public blockchain networks.
IT WASN’T ALWAYS THIS WAY
Yet the banking sector hasn’t always been a friend to digital currencies. In 2017, as the cryptocurrency market achieved a valuation of $800 billion, Woori Bank, the largest commercial financial institutions in the country, denied banking services to cryptocurrency exchanges. Given Woori’s size and influence, many banks followed its approach. Even through the middle of this year, several cryptocurrency startups were denied by Woori Bank.
Two banks, however, stepped up to fill the void. Nonghyup and Shinhan Bank decided to work with local cryptocurrency exchanges despite the risks. There was a concern the Financial Services Commission (FSC) might declare that providing services to digital asset trading platforms wasn’t legal. That cloud of uncertainty has passed, though, as FSC and commissioner Choi Jung-gu declared that commercial banks can freely work with local cryptocurrency exchanges and provide virtual bank accounts to digital asset investors.
“There exists no issue in banks providing virtual bank accounts to cryptocurrency exchanges. If digital asset trading platforms have [know your customer] and [anti-money laundering] systems in place, there is no problem in issuing virtual bank accounts to exchanges,” Choi explained.
Although both Shinhan Bank and Nonghyup actively worked with cryptocurrency exchanges prior to the statement of commissioner Choi, his statement clarified that all banks in the country can provide banking services to digital asset exchanges without the risk of any repercussion.
KOREAN COURTS: BANKS CANNOT UNFAIRLY REJECT CRYPTO EXCHANGES
In the meantime, the legal and regulatory landscape in South Korea continues to improve. Most recently, on October 30, the Seoul Central District Court issued a ruling for a case in which Coinis, a small cryptocurrency exchange, prevailed over Nonghyup in a contract dispute. The case centered around a complaint by Coinis that Nonghyup had unilaterally ended the banking relationship between the two firms and harmed the exchange by doing so. The court agreed with Coinis’ contention and required Nonghyup to resume banking services for the cryptocurrency exchange.
Attorney Kim Tae-rim, the representative of Coinis, told local publications the court ruling sets a precedent for the entire cryptocurrency exchange market of South Korea. Specifically, that banks will no longer be able to opaquely withhold banking services from cryptocurrency exchanges.
“Cryptocurrency exchanges, by default, have the right to freely deposit and withdraw funds to and from major banks in South Korea, and an abrupt termination of partnership and services by the bank [in this case Nonghyup] without sufficient evidence or reasoning falls under the breach of contract,” Kim said.
This paves the way for crypto exchanges to operate with the certainty of banking relationships so long as they stick to the regulatory guidelines of the Financial Services Commission. If so, they’re guaranteed access to South Korea’s banking system. This regulatory certainty benefits not only the exchanges but also customers, who need not worry about losing access to the platforms — nor to their funds.
SOUTH KOREA IN PRIME POSITION TO COMPETE AGAINST JAPAN, U.S.
In January 2018, the trading volume of cryptocurrency exchanges in South Korea was merely a fraction of Western exchanges like Coinbase and Japanese platforms such as bitFlyer. But with a guarantee of stable banking services, the imposition of practical regulatory frameworks by the Financial Services Commission, and the deep involvement of Shinhan Bank in the local cryptocurrency exchange market, crypto-related businesses in the country are expected to be in an ideal position to compete against Japan and the U.S.
By the end of 2018, local publications have reported the government is set to offer clarity on the country’s blanket ban on initial coin offerings. Speculation is running rampant that ICOs could be legalized in South Korea in the not-too-distant future — assuming, of course, they are compliant with the new regulations. If ICOs do officially become legal, they will have access to a robust, competitive local market for their tokens. That combination places South Korea in a strong position to become a leader in the trading of digital assets. Given the nation’s relatively small population and the complexity of its business relationships, this wasn’t always a guarantee. But for now, Korean crypto is on the rise.