For sound competition in the crypto-asset market… We need to consider an “ownership stake cap” [Pacific’s Future Finance]

Homegrown trading platforms... fundamentally different from stock exchanges

Need to weigh the effects of “ownership stake cap regulation”

It has not been that long since crypto-asset businesses—especially those known as crypto-asset exchanges—came to be regarded in Korea as coveted service providers. Although the government announced strong regulatory measures on crypto-asset trading in 2017, it was only after amendments to the Act on Reporting and Using Specified Financial Transaction Information (passed in 2020) took effect in 2021 that the industry truly came within the regulatory perimeter. After Korbit first launched an exchange service in 2013, the sector entered a formal legal framework eight years later amid many upheavals.

However, unlike the historical development of the crypto-asset market to date, discussion has suddenly begun on limiting ownership stakes in crypto-asset exchanges. The main argument is that because crypto-asset exchanges are a kind of public good, their ownership stakes should be capped at around 15%, in line with alternative trading systems (ATS) under the Capital Markets Act. In light of the past, this is evidence that crypto-asset exchanges—and, more broadly, the crypto-asset market—have gained that much influence in Korean society. At the same time, it marks a sea change compared with the industry’s past hardships.

“Need to consider characteristics different from stock-market exchanges”

From the perspective of the author, who has provided legal advice on crypto assets, it is pleasing to see that the crypto-asset market appears to have taken root in society as social perceptions have shifted. Still, it is worth considering what necessity justifies limiting the ownership ratios of shareholders who have worked to build the market up to this point.

Putting together what is being discussed, the idea is to legislate an ownership stake cap for crypto-asset exchanges and require forced sales of holdings exceeding the cap to maintain it. It is necessary to examine whether there is sufficient justification to compel an act akin to expropriation of already established property rights.

The key logic behind the ownership cap appears to be that, with more than 11 million users and annual trading volume exceeding KRW 1,000 trillion, crypto-asset exchanges have public-good characteristics similar to ATS, and that entrenchment of an oligopoly in the domestic won-based crypto-asset trading market is progressing—making measures necessary to address market concentration and competition issues.

But considering how crypto-asset exchanges emerged and the market environment, it is hard to see them as equivalent to ATS. Crypto-asset exchanges are homegrown trading platforms created by market participants investing their own capital. Their origins differ from those of exchanges in the securities market. Setting by law how property rights are to be formed at the stage of establishing a new entity—such as an ATS—tends to pose a lower risk of infringing fundamental rights, whereas restricting already established property rights requires correspondingly closer scrutiny of the justification. It is also questionable whether an ownership cap would help resolve market concentration. A more persuasive view is that the primary driver of concentration is the limited number of market participants and the lack of development in diverse crypto-asset services.

“Expanding service participation and trading methods is the solution”

The author also hopes the crypto-asset market becomes more active and establishes itself as a more competitive market. However, to build a sound market ecosystem and secure international competitiveness, it may be more effective than an ownership cap to: expand the number of exchanges granted real-name bank accounts to increase service participants; meaningfully allow overseas crypto-asset businesses to enter the Korean market; and actively consider introducing diverse trading methods by diluting the exchanges’ dominance through services such as exchange-traded funds (ETFs). In other words, the time calls for serious consideration of whether revitalizing the crypto-asset market by offering users freer access to a wider range of participants and services could help ease the currently discussed concentration phenomenon.

The Future Finance Strategy Center of Bae, Kim & Lee LLC (Director: Senior Advisor Han Joon-sung) was launched in May 2024 and has assembled a leading team of experts in finance and IT—covering crypto assets, electronic finance, regulatory response, and information security—in step with the acceleration of digital innovation in the financial sector and advances in financial technology.