(Bloomberg) -- The beating heart of the crypto bull market sweeping the world isn’t Miami, Paris or the Middle East. It’s South Korea, where speculation has reached such intensity that the won has supplanted the dollar as the most-used currency for swapping in and out of Bitcoin and other tokens. 

At the center of this bonanza is Upbit, an exchange based in Seoul’s ritzy Gangnam district whose wide array of listed coins and ease of access have helped it claim the lion’s share of Korea’s crypto market.  

Trading on Upbit accounts for over 80% of Korean volumes, a level of dominance no other exchange has achieved in a major crypto hub. Frenzied trading by local investors means it now ranks among the top five exchanges globally by volume, running neck-and-neck with Coinbase. Upbit’s customers last year accounted for almost a fifth of its main banking partner’s total deposits, prompting a sharp rebuke from a South Korean lawmaker. 

Now, new legislation designed to protect investors after South Korean entrepreneur-turned-crypto-fugitive Do Kwon’s brainchild — the TerraUSD stablecoin — imploded in 2022 risks unintentionally tightening Upbit’s vice-like grip on the market.

Under the new regulatory regime, crypto exchanges will have to bulk up reserves, get investor-protection insurance and step up monitoring for suspicious transactions, requiring both “capital and manpower,” said Nam HyeonJoon, a spokesperson for Bithumb, Korea’s second largest trading platform. 

“For existing and new entrants, the cost of complying with these requirements could be substantial,” said Simon Seojoon Kim, CEO of Korea-based venture capital firm Hashed. Meeting the new standards will be easier for well-resourced exchanges like Upbit, he added. Hashed doesn’t invest in local exchanges to avoid conflicts of interest under Korea’s regulatory regime.

Singapore-based Crypto.com on Tuesday delayed its planned launch in South Korea just six days before it was supposed to go live there, saying it needed to communicate more with regulators. The announcement followed a report from local news outlet Segye Ilbo that the Financial Intelligence Unit visited Crypto.com’s regional office after finding “concerning matters” in submitted documents related to anti-money laundering. 

Crypto.com didn’t comment on the report. The Financial Services Commission, which oversees the FIU, also declined to comment.

‘I’m All in Crypto’

Far from retreating in the shadow of the $40 billion TerraUSD blow-up, Koreans continue to rank among the world’s keenest crypto traders with a taste for high-risk, high-reward tokens.

Official figures show that more than 6 million Koreans — over 10% of the population — traded crypto on registered exchanges in the first half of last year. The won, which has long rivaled the US dollar on crypto exchanges, became the most traded currency against crypto-assets globally in the first quarter of this year.

“I invested more in stocks before, but now I’m all in crypto,” said 35-year-old Ho Chan Chung, head of marketing at Korean analytics firm CryptoQuant. “The Korean stock market has stagnated, and companies don’t operate for shareholders’ benefit.” Since 2019, the Kospi returned roughly 21% while Bitcoin soared 1,270%.

Such is crypto’s mass appeal that it has become a political issue in Seoul, with rival candidates in the recent parliamentary elections promising to delay digital-asset taxes or lift restrictions on investing in US Bitcoin ETFs.

Smaller tokens — so-called altcoins — account for 80% of Korean exchanges’ volume compared with roughly 50% on global platforms, according to CryptoQuant data. 

Upbit, run by fintech firm Dunamu Inc., was launched in 2017. The exchange now accounts for almost 5% of overall crypto trading volume globally, up from 1.4% in January 2021, according to CCData.

Founded in Seoul in 2012 by Song Chi-hyung and Kim Hyoung-nyon, both former executives at mobile payment firm Danal, Dunamu found early backers in South Korean internet giant Kakao Corp. and Woori Technology Investment. It became one of Korea’s highest-valued startups during the pandemic bull run with a peak valuation of $15.7 billion according to OTC trading platform ustockplus.com. 

In 2021, Upbit became the first exchange registered with the Financial Intelligence Unit thanks to a partnership with K-Bank, an online lender. Exchanges must have banking partners before registering with Korean regulators.

Local media reported last year that Upbit accounted for 18% of K-Bank’s total deposits, drawing criticism from lawmaker Kim Heegon, who described the bank as “Upbit’s private safe deposit box” in October. 

A spokesperson for K-Bank said in an interview that Upbit contributes a “very small part” of revenue and deposits from the exchange aren’t used for lending, meaning they can be withdrawn at any time. The spokesperson declined to comment on the current share of deposits coming from Upbit.

Upbit got an early edge by teaming up with Kakao, which runs the dominant local mobile-messaging app. The tie-up allowed traders to sync their KakaoTalk and Upbit accounts, making onboarding seamless. 

“It was transformative,” said Abel Seow, director for Asia-Pacific at crypto custodian BitGo. “Imagine being able to create a Binance account from your WhatsApp ID.” 

Kakao’s investment arm owns almost 11% of Dunamu. Lee Sirgoo, who’s been Dunamu’s chief executive officer for about six years, was previously co-CEO of Kakao according to his LinkedIn profile. 

Smaller Rivals Shutter

From July, Korean regulators will implement the Virtual Asset User Protection Act, passed last year following the demise of Kwon’s ill-fated stablecoin project. That event is estimated to have cost investors far more than the failure of FTX, whose co-founder Sam Bankman-Fried was sentenced to 25 years in prison last month. Kwon is likely to be extradited to the US, where he’s wanted on fraud charges.

South Korea will impose strict requirements on exchanges, including potential life sentences for criminal acts, with operators required to segregate user deposits and take steps to meet liabilities after hacks or system failures.

Since the crypto law passed last June, smaller exchanges Huobi Korea, Cashierest and Coinbit have shuttered.

Min Seung Kim, an analyst at Korbit Research, expects Upbit to stomach the new requirements with relative ease, adding that competition remains limited with trading “increasingly focused on the top exchange.”

Challengers to Upbit’s dominance have little choice besides slashing fees. 

Bithumb briefly gained ground on Upbit through a zero-fee promotion that began last October. Its market share peaked at 39.2% in January but promptly dropped by more than half after the promotion ended. Others like Korbit and Binance-backed Gopax have less than 1% share.

Crypto.com CEO Kris Marszalek acknowledged South Korea’s challenges in a April 16 interview with Bloomberg News, but said the heady mix of volume and volatility is just too much to pass up. 

“We go in with our eyes open,” he said. “It is a possibility that we will not be able to get much for sure. This is Korea, right? But again, the potential upside is worth the effort.”

A week later, its expansion plan suddenly in question, the company repeated its leader’s take on the country — and added an overture to regulators. 

“Korea is a difficult market for international exchanges to enter, but we are committed to working with regulators to advance the industry responsibly for Koreans,” it said in the statement announcing the launch delay. 

--With assistance from Jaehyun Eom and Jenny Lee.

©2024 Bloomberg L.P.