Source: Presto Research; Compiled by: Tao Zhu, Golden Finance

Summary

• Driven by a tech-savvy population, South Korea’s cryptocurrency market is characterized by intensive retail investment, giving rise to unique phenomena such as the “Kimchi premium” and the “IPO boom.”

• The history of cryptocurrency in South Korea has been marked by significant regulatory developments, primarily focused on strengthening market integrity and investor protection.

• However, despite high trading volumes and regulatory progress, market builders face challenges due to public perception of cryptocurrencies and the lack of regulation in the space.

Figure 1: The Korean Won is consistently ranked in the top two fiat currencies by trading volume globally.

Preface

Thanks to widespread internet access and a tech-savvy population, South Korea has become a technological powerhouse and plays an important role in the global cryptocurrency sector. Characterized by its enthusiastic retail investor base, South Korea exhibits unique market phenomena such as the "Kimchi Premium" and the "IPO Boom," reflecting the enthusiasm of South Korean citizens for cryptocurrency investments. However, these behaviors have also raised concerns among regulators and market observers, leading to the introduction of new regulations that are expected to affect the global cryptocurrency market.

In this research article, we (1) introduce the history of cryptocurrency in South Korea, (2) examine the current status of the industry, especially the aforementioned phenomena and new regulations, and (3) explore some of the major players in the domestic market.

The History of Cryptocurrency in South Korea

~2017:

• Prior to 2017, cryptocurrencies were not mainstream in South Korea, in line with global trends. Some notable events include Korbit becoming the first cryptocurrency exchange in South Korea in 2013, followed by Bithumb in 2014.

2017:

• Bull Run: 2017 marked the beginning of South Korea’s cryptocurrency craze. The bull run attracted millions of retail investors, with Bithumb regularly ranking among the top exchanges in the world by daily trading volume, and the kimchi premium (described later) reaching 30-40%.

• ICO Ban: In September 2017, the Financial Services Commission (FSC) of South Korea announced a ban on all forms of initial coin offerings (ICOs) to protect investors and prevent potential financial fraud and speculation. To this day, platforms such as CoinList are still banned in South Korea.

2018:

• "Park Sang-ki Crisis": In January 2018, Justice Minister Park Sang-ki announced that the government was considering closing all cryptocurrency exchanges, causing significant market turmoil and a sharp drop in Bitcoin prices.

Figure 2: $BTC price dropped sharply following his comments.

• Real-name transactions: On January 30, 2018, the "real-name system" came into effect, requiring all cryptocurrency exchanges to cooperate with banks to provide real-name authentication accounts for transactions. This move is aimed at improving transparency and preventing money laundering.

2020/2021:

• Amendment to the Special Financial Information Act: In March 2020, the National Assembly passed an amendment to the Act on Reporting and Use of Specified Financial Transaction Information (commonly known as the Special Financial Information Act or 특금법) to include regulation of cryptocurrency exchanges. The amendment requires all virtual asset service providers (VASPs) to register with the Financial Services Commission (FSC) and comply with anti-money laundering (AML) and know your customer (KYC) regulations. The law came into effect in March 2021.

• After the law was enacted, only 29 of the 63 exchanges were successfully registered. Of these, only five exchanges (Upbit, Bithumb, Coinone, Korbit, and later Gopax) received ISMS certification and real-name accounts, allowing them to operate the Korean won market.

• The law also applies to foreign exchanges, forcing exchanges like Binance to shut down Korean language support and P2P services. As of now, three principles apply: no support for the Korean won, no use of the Korean language, and no direct sales in Korean.

2022:

• Terra Luna Collapse: The collapse of Terra (LUNA) and its stablecoin $UST in May 2022 caused major turbulence in the global cryptocurrency market. This incident had a significant impact on the overall market, especially the psychology of Korean investors. It also raises concerns about the stability and regulatory oversight of stablecoins. Given Terra’s close ties to South Korea, particularly through Do Kwon and its ecosystem, the incident has a significant impact on the South Korean cryptocurrency landscape.

Figure 3: Decline of the Terra ecosystem.

• DAXA: The Digital Asset Exchange Alliance (DAXA) is formed by major Korean exchanges (Upbit, Bithumb, Coinone, Korbit, and Gopax) to strengthen cooperation and establish industry standards to better protect investors and market integrity.

• Travel Rule: Following FATF guidance, South Korea introduced the “Travel Rule” to increase transparency in cryptocurrency transactions and combat illicit activities.

2023/2024:

• Haru Invest/Delio bankruptcy: In 2023, two cryptocurrency digital asset managers went bankrupt amid allegations of a Ponzi scheme. The event added to negative sentiment following the Luna debacle, highlighting regulatory gaps and investor protection issues amid allegations of mismanagement and financial irregularities.

• Guidelines for Security Token Offerings (STOs): In February 2023, the Financial Services Commission announced guidelines for regulating security tokens under the Capital Markets Act. The guidelines focus on the principles for determining whether a token qualifies as a security and the regulations governing the offering and issuance of tokenized securities.

• Virtual Asset User Protection Act: Passed in June 2023, this bill seeks to protect investors by imposing fines for price manipulation and other market abuses. It is the first phase of a comprehensive bill designed to provide a comprehensive regulatory framework for digital assets.

2024+:

• Virtual Asset User Protection Law: The aforementioned bill will be implemented on July 19, 2024. While this phase focuses on user protection and preventing abusive trading, the second phase will likely focus on market entry and operations for virtual asset service providers. However, discussions on the second phase have not even begun, and considering that the first phase took 20 months to pass, it may take longer to see what will be included and the timeline.

• Cryptocurrency Tax: Cryptocurrency taxation in South Korea has been a key issue during the election season. The implementation of crypto taxation has been repeatedly postponed since 2022 as part of the government’s efforts to woo voters ahead of the general election. As of today, starting in 2025, a flat 20% capital gains tax will be imposed on annual gains over 2.5 million won (about $1,900).

Figure 4: Cryptocurrency taxes by country.

Virtual Asset User Protection Act

As listing on a South Korean exchange has become a major milestone for crypto projects, there has been a lot of interest in the guidelines and regulations that govern the listing process. Currently, there are no clear regulations on the listing and delisting of cryptocurrencies on Korean exchanges. The only existing guidelines come from DAXA, a consortium of five major South Korean exchanges, which provided an initial framework for new listings in March 2023. However, the guidelines have been criticized for their lack of clarity, so DAXA is revising the guidelines to provide further details under the supervision of regulators. This will be implemented under the Virtual Asset User Protection Act, which promises to be a major step forward for South Korean regulation that everyone should pay attention to.

Virtual Asset User Protection Act (Virtual Asset User Protection Act)

Scheduled to take effect on July 19, 2024, the Virtual Asset User Protection Law focuses on investor activities on exchanges, including:

• Protecting customer deposits

• Strengthening trusteeship responsibility

• Monitor suspicious transactions

• insider trading

Listing/Delisting Guidelines

Under the supervision of the FSC/FSS, DAXA plans to implement the "Best Practices for Compliance with the Virtual Asset User Protection Law" after the implementation of the Virtual Asset User Protection Law. The guide contains listing and delisting standards and is currently accepting industry feedback. The listing review standards include nine requirements, which are reviewed quarterly and cover four main areas:

• Issuer reputation

• Failure to disclose material information related to virtual assets, or repeated and arbitrary changes without justifiable reasons.

• The primary wallet information of the issuer and operator is not verified.

• User Protection Measures

• Failure to verify important explanatory materials (white papers) related to virtual assets prepared by issuers and operators.

• Lack of on-chain transaction monitoring tools (blockexplorer).

• Technical Security

• Unexplained or unresolvable security incidents involving virtual assets, wallets, or distributed ledgers.

• The source code of the distributed ledger intrinsic token smart contract was not verified, and important event functions were improperly set.

• Comply with regulations

• Self-issued currencies and other virtual assets that are considered illegal.

• Supporting transactions in virtual assets that could be used for illegal activities or violate existing regulations.

Any virtual assets related to the above eight items are considered non-compliant and should not be listed. In addition, the financial authorities have introduced a ninth qualitative review criterion, including the following:

• The capabilities, social reputation and past operating history of the entities involved in issuing, operating and developing the securities.

• Disclosure of material information related to virtual assets.

• The overall issuance and circulation plan, changes in the business plan, transparency of the changes and the reasons for the changes.

• Whether the access control settings for important event-related functions of the token smart contract are appropriate.

These evolving guidelines aim to provide a structured, secure environment for cryptocurrency trading in South Korea, address current ambiguity and enhance market integrity.

So where are we now?

Retail investor frenzy

South Korea’s retail enthusiasm can be attributed to cultural factors such as widespread technology adoption due to fast internet speeds, a risk-taking culture, and a mono-ethnic society where trends evolve quickly. As a result, South Korea has been one of the largest markets in the cryptocurrency space since 2017, with its exchanges becoming key platforms for projects to get listed. Even today, Upbit is consistently ranked among the top five exchanges by average trading volume and is often second only to Binance. This is particularly surprising considering that Korean exchanges are limited to South Korean residents, unlike exchanges such as Binance, Coinbase, and HTX that have a wider audience.

Figure 5: Upbit ranks second in average trading volume.

Recently, cryptocurrency trading volume in South Korea has surpassed that of KOSDAQ and KOSPI. The surge in trading volume highlights the deep integration of cryptocurrencies in the country's financial landscape. The strong interest in cryptocurrencies has led to some interesting market phenomena: the kimchi premium and the listing boom.

Kimchi Premium

The Kimchi premium refers to the price difference between cryptocurrencies on South Korean exchanges and global exchanges. Due to regulatory challenges that hinder arbitrage, there is usually a 2-3% premium, meaning that cryptocurrencies on South Korean exchanges trade at a higher price. However, during particularly bullish market periods such as April, this premium can spike to around 14%.

Figure 6: Kimchi Premiums Soar During High-Volume Bull Markets.

Listing Pump

Another interesting phenomenon is the listing pump, which occurs when Upbit or Bithumb announces a project is listed. Depending on factors such as market cap, liquidity, and the availability of perpetual contracts, the price of a newly listed cryptocurrency can surge immediately after the announcement. While listing on a Korean exchange does enhance liquidity and is often viewed as fundamentally positive, the resulting price pump is usually short-lived and tends to be a one-off event rather than a sustainable trend.

Figure 7: Asset prices rose after Upbit’s listing announcement.

Despite progress in regulating exchanges and protecting investors, the outlook for South Korean Web3 operators and builders is in stark contrast. Currently, no significant local South Korean projects are in the top 100 by market cap, which is surprising given the popularity of the asset class. The main inhibitors appear to be public attitudes toward cryptocurrencies and regulatory uncertainty surrounding Web3 projects.

While cryptocurrency is popular in South Korea, it is often viewed as a form of gambling rather than a long-term investment in Web3 technology. Erratic market behavior such as listing/delisting pumps (e.g., price spikes around the time of token delisting announcements) reinforces this perception, and as a result, the market's focus remains on short-term speculation rather than long-term investments based on Web 3 fundamentals. Additionally, the collapse of LUNA in May 2022 has exacerbated negative public sentiment toward cryptocurrencies, leading to intense media scrutiny of all crypto projects operating in South Korea. Furthermore, despite the genuine enthusiasm of the South Korean public, these projects have become a target for politicians, creating challenges for the country's sustainable development.

Figure 8: South Koreans prefer altcoins over major currencies.

Unclear regulations also contribute to this complexity. While government officials are actively developing a regulatory framework, existing regulations focus primarily on investor protection, with little attention paid to supporting innovation and nurturing the industry. For example, Virtual Asset Service Provider (VASP) license requirements apply only to exchanges, wallets, and custodians, while the initial phase of the Virtual Asset User Protection Act primarily addresses the operational aspects of exchanges. Additionally, South Korea’s ban on P2E games often leads to mixed results, with top global Web2 game studios setting up operations in South Korea to access local talent, only to end up serving offshore markets. This regulatory ambiguity and delays have forced many South Korean developers to relocate operations to more favorable jurisdictions such as Singapore, stifling local innovation despite the country’s technological capabilities.

Major players in the South Korean cryptocurrency market

Exchanges

Although there are no clear regulations, cryptocurrency futures trading is not allowed in principle in South Korea due to restrictions by the Financial Services Commission (FSC). As a result, the Korean cryptocurrency market is dominated by five major spot exchanges: Upbit, Bithumb, Coinone, Korbit, and Gopax. These exchanges occupy a considerable market share, with Upbit and Bithumb accounting for nearly 96% of the total trading volume.

Figure 9: South Korean exchange market share as of today.

• Upbit: Dunamu-owned Upbit is undoubtedly the number one cryptocurrency exchange in South Korea. Dunamu also operates the stock trading platform Luniverse (Web3 product) and even has businesses such as a secondary monitoring platform. Dunamu is currently valued at around $2.5 billion in the OTC market and reports sales of $2.7 billion in 2023. Today, Upbit offers the KRW/BTC/USDT pair, with the majority of its volume coming from the KRW market.

• Bithumb: Although Bithumb's governance structure has been unclear, the exchange is currently valued at approximately $289 million in the OTC market and has announced plans to IPO in 2025. Bithumb maintained its number one position in the exchange market until 2020, but lost a significant amount of market share to Upbit. Nevertheless, Bithumb has recently regained market share with its aggressive fee policy and continues to exert significant influence, which is often demonstrated in the exchange's "listing boom".

Figure 10: Korean exchange market share history shows that Bithumb once occupied the first position until 2020.

• Coinone: Coinone has a market share of 1.1% and is the first exchange in South Korea to list Ethereum.

• Gopax: Binance acquired a 72.26% majority stake in Gopax as a strategic move to enter the Korean market. However, the process is still subject to government approval due to regulatory uncertainties.

• Korbit: With a market share of 0.4%, Korbit is the oldest cryptocurrency exchange in South Korea.

project

i) Here

Born out of the merger of Klaytn and Finschia, Kaia is a new Layer-1 project led by South Korean tech giants Kakao (Klaytn) and Naver's Line (Finschia). The merger aims to integrate their respective blockchain platforms into a unified system named after the Greek word for "and", which symbolizes connection. The project is scheduled to launch at the end of this year and will become the main Layer-1 blockchain in South Korea. This merger is also one of the few M&A cases in the crypto industry so far, which is worth paying attention to.

ii) Delabs

South Korea has been a leader in Web2 gaming, with major companies such as Nexon, Netmarble, NCSOFT, and Krafton dominating the global market. So naturally there are a lot of ongoing attempts in the P2E (Play-to-Earn) space, with people from these major game studios, and even entire studios themselves, entering the Web3 space, such as Wemade and Nexon. South Korean game studio Delabs Games, a subsidiary of 4:33 Games, is also part of this trend. Founded by former Nexon head Joon Mo Kwon, Delabs Games is making its mark in the Web3 space.

Summarize

South Korea’s cryptocurrency market presents complex retail investment and regulatory challenges. Despite the country’s large, tech-savvy population, the lack of significant homegrown blockchain projects highlights persistent regulatory and public perception barriers. The upcoming Virtual Asset User Protection Act marks a step toward addressing these issues, aiming to improve market integrity and provide clearer operational guidelines. However, for South Korea to truly capitalize on its technological prowess and market enthusiasm, it will need to foster an environment conducive to blockchain innovation, overcome negative public sentiment, and ensure a balanced regulatory framework that encourages long-term investment in Web3 businesses and sustainable growth. This balanced approach will be critical for South Korea to establish itself as a global leader in the evolving crypto space.