The Bank of Korea: "Domestic Cryptocurrency Risks Are Small... Regulatory Effectiveness Must Be Enhanced"

The Bank of Korea emphasized the need to establish regulations on crypto assets from the perspective of 'same activity, same risk, same regulation,' as the current domestic crypto asset ecosystem is relatively low risk but risks may expand in the future due to increased interconnectedness between the crypto asset sector and the traditional financial system.

In its BOK Issue Note report titled "Assessment of Vulnerabilities in the Crypto Asset Market and Implications through Major Global Events" released on the 18th, the Bank stated, "Last year, the global crypto asset market revealed vulnerabilities similar to those in traditional financial markets, with events such as the sharp decline of algorithmic stablecoins TerraUSD/Luna, the bankruptcy of crypto asset lending platform Celsius, hedge fund 3AC, and crypto asset exchange FTX."

According to the Bank of Korea, the sharp decline of the algorithmic stablecoin TerraUSD/Luna was due to the failure of its price stabilization mechanism and an unsustainable business model reliant on continuous new capital injections.

Additionally, the crypto asset lending platform Celsius went bankrupt due to asset-liability maturity mismatches and failures in liquidity risk management, and Singapore-based hedge fund 3AC went bankrupt after investing in the Bitcoin investment trust (GBTC) using excessive leverage based on optimistic expectations that crypto asset prices would continue to rise.

In the case of crypto asset exchange FTX, bankruptcy occurred following a loss of trust due to opaque internal transactions with affiliated companies and the exclusive use of customer deposits, which led to massive withdrawals.

The Bank explained that the current domestic crypto asset ecosystem is mainly composed of exchanges focused on simple trading brokerage due to relatively strict regulatory approaches such as the prohibition of Initial Coin Offerings (ICO), making the likelihood of incidents similar to those in the global crypto asset market low.

Domestic crypto asset exchanges (27 in total) are divided into won-denominated exchanges (5), where crypto assets can be traded with Korean won, and coin exchanges (22), which only support exchanges between crypto assets. The current Act on Reporting and Using Specified Financial Transaction Information mandates the separation of customer deposits and proprietary assets and prohibits the trading, exchange, and brokerage of virtual assets issued by virtual asset service providers or their related parties, making the occurrence of situations like the FTX incident in Korea unlikely.

The Bank stated, "Other virtual asset service providers (9 in total) are classified into crypto asset wallet providers specializing only in custody and management of crypto assets, and providers offering financial or payment services based on wallet services," adding that "the scale of crypto asset custody services is not large, and since their main clients are crypto asset companies, the damage to general customers in the event of negative incidents is expected to be limited."

Some big tech and gaming companies are developing their own blockchain networks and issuing crypto assets through overseas local subsidiaries, but the market capitalization of crypto assets issued by domestic big tech companies is very small compared to the overall crypto asset market size, and currently, these companies are not assessed to carry risks comparable to systemically important crypto asset conglomerates.

However, the Bank emphasized the need to prepare a comprehensive response system to address potential ripple risks arising from increased interconnectedness between the crypto asset sector and the traditional financial system in the future.

The Bank stated, "It is necessary to establish regulations on crypto assets from the perspective of 'same activity, same risk, same regulation,' and to coordinate with major countries in terms of the speed and intensity of regulations to prevent regulatory arbitrage between countries."

It added, "It is important to enhance the effectiveness of regulations by establishing and operating a close cooperation system among relevant authorities such as the government and central bank in terms of crypto asset market monitoring, information collection, and supervision and oversight."

This content was produced with the assistance of AI translation services.