- The model pairing an exchange with a single bank is not legally mandated but is widely practiced.
- A government-commissioned study found that this arrangement restricts access for smaller crypto exchanges.
- Large platforms dominate won-based trading in Korea thanks to superior liquidity.
South Korea’s top regulators are reportedly reviewing how local cryptocurrency exchanges partner with banks, aiming to level the playing field.
The prevailing system often ties each crypto exchange to a single bank, which limits choices and creates high barriers to entry for smaller firms.
Although this arrangement is not enshrined in law, it has become widespread as a response to anti-money laundering and identity verification requirements.
The Financial Services Commission and the Fair Trade Commission are coordinating a review to determine whether this longstanding practice stifles competition and reinforces the dominance of a few large exchanges.
Rules may favor larger exchanges
Under the current framework, exchanges need exclusive partnerships with domestic banks to allow customers to deposit and withdraw Korean won.
Without that banking link, they cannot offer basic fiat services.
The model emerged to address increasing demands for transparency and risk control, but it can now disadvantage smaller market participants.
A recent government-commissioned study examined how current crypto-related regulations affect competition.
The researchers concluded that the one-exchange–one-bank arrangement makes it more difficult for newer or smaller exchanges to access banking services.
While the approach helps manage financial risks, applying the same strict standards uniformly can be excessive given differences in company size, trading volume and risk profiles.
The study also noted that most won-based crypto trading in Korea takes place on just a handful of major platforms, resulting in a highly concentrated market.
Liquidity gap highlights entry barriers
Researchers pointed out that when a few platforms dominate trading volumes, they benefit from deeper liquidity and faster execution.
This creates a feedback loop: users tend to flock to larger exchanges, which further limits the reach and competitiveness of smaller platforms.
As long as access to banking remains difficult, that dynamic is unlikely to change.
Market concentration can reduce dynamism, hinder innovation and limit consumer choice.
Consequently, the current structure may reinforce the positions of already-strong exchanges rather than promoting healthy competition.
Lawmakers postpone key digital asset bill
The review of relationships between exchanges and banks comes amid broader legislative delays.
The Digital Asset Basic Act, which is expected to reshape the country’s crypto rules, was initially slated for introduction before the end of 2023.
On December 31, legislators postponed the bill until 2026.
The proposed law would permit the launch of stablecoins backed by the Korean won, provided issuing firms store reserve assets with approved custodians such as banks.
The delay stems from disagreements over how stablecoin issuers should be supervised and whether a new regulatory body should pre-approve them.
The Financial Services Commission is also weighing how both financial and non-financial firms can participate in the sector without compromising safety.
The stated goal is to support innovation while maintaining robust regulatory safeguards.