2. Reshuffle in South Korea’s Crypto Exchange Market Since the introduction of the Act on Reporting and Using Specified Financial Transaction Information
An analogy is often drawn between the great tulip bulb bubble in the 1600s and the crypto craze in 2017. One of the countries at the epicenter of the fever was South Korea. Although there were times when investment slowed after a slump in the price of Bitcoin that had started at the beginning of 2018, crypto investment boomed again in 2020, and the growth of the market has been exponential to date.
As the market's growth accelerates, the number of cryptocurrencies listed on the crypto exchanges is steadily on the rise, along with the trading volume growing dramatically from KRW 100T in 2Q 2020 to KRW 1, 500T in 2Q 2021. In 2H 2021, the average daily trading volume of the crypto market in South Korea hit KRW 11T, which outstrips KRW 7.4B of KONEX and is on a par with KRW 11T of KOSDAQ.
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Looking at its market share, South Korea is already a force to be reckoned with in the global crypto market. As of 1Q 2022, the trading volume of the South Korean exchanges represents 5% of the global crypto transactions. In terms of Bitcoin’s trading volume, which gives us an indirect estimation of the traded value of cryptocurrencies, South Korea (3.7%) ranks third after the U.S. (84.4%) and Japan (6.9%) (Source: Coinhillls), demonstrating its presence.
As a follow-up to the November 2020 analysis, analyzed South Korea’s crypto market as of May 2022, focusing on the trading volume. With the introduction of the Act on Reporting and Using Specified Financial Transaction Information (hereinafter “the Act”) and the Travel Rule, South Korea’s crypto market has been in a sense more formally included in the system, putting the market at a watershed between progress and regress.
Based on the analysis of the traded value from 1Q 2021 to 1Q 2022 of the top 4 crypto exchanges in South Korea, we will first discuss how South Korea’s crypto trading patterns stand apart from the global trend and move on to crypto regulations and the most widely known projects in South Korea.
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In Sep 2021 when the Act on Reporting and Using Specified Financial Transaction Information came into effect, most of the crypto exchanges in Korea that failed to obtain real-name bank accounts suspended buy/sell trades of assets in KRW, further solidifying the dominance of the top 4 crypto exchanges—Upbit, Bithumb, Coinone, and Korbit.
Of the 63 crypto exchanges in South Korea, only 23 managed to register their business with the authority, while even among the 23, only four were able to obtain the Information Security Management System (ISMS) certification to allow assets to be traded in KRW. Recently, GOPAX has opened the KRW market after it entered a partnership with Jeonbuk Bank to secure real-name bank accounts, but the trading volume has not come in big numbers.
The ”coin market” exchanges where assets are traded in pairs (i.e., BTC/ETH) are significantly less competitive than the “KRW market” exchanges, making it virtually impossible for the coin market exchanges to survive. The 2H 2021 Survey Results of Virtual Asset Service Providers published by the Financial Services Commission (hereinafter, “the FSC”) reaffirmed that as of 2H 2021, South Korea’s crypto market is split into KRW- and coin-based markets in an overwhelming ratio of 95-to-5 percent ratio, with the daily traded value standing at KRW 10.7T and KRW 0.6T, respectively.
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Given that transaction fees are the source of income for crypto exchanges, the traded values are directly linked to their revenue. So it is only natural that the KRW-based market grew exponentially in almost all aspects, including revenue, operating profit, and net income while the coin-based market waned. The big four are looking set to grow further this year, propelled by the oligopoly they could build on the foundation of law.
Meanwhile, Korbit reported a net operating loss of KRW 2.7B, which was in contrast to the burgeoning surplus of Upbit, Bithumb, and Coinone. As of 2021, more than 95% of the crypto trades are taking place in Upbit and Bithumb, giving latecomer Korbit no other choice but to come up with a strategy to secure enough transactions.
3. Upbit and Layer 1: An Exchange with the Overwhelmingly Largest Trading Volume and the Most Prevailing Blockchain Sector3-1. Winning the Largest Pie of the Market: Upbit’s Convenient UI/UX and Successful Customer Onboarding
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The introduction of the Act reshuffled the market landscape in 2021, until which year the market was pretty much split by the big four exchanges. Unlike until 2019, when Bithumb had remained the overwhelmingly predominant player in the market, Bithumb’s trading volume topped Upbit’s by a narrow margin between Jun and Sep 2020, virtually dividing up the market into two.
The year 2021 was different though. Upbit took over more than 75% of the traded value, tightening its grip on the market. The primary drivers behind it are considered to be: i) easy-to-use UI/UX, ii) lower KRW transaction fees, iii) partnership with K Bank in Jun 2020 and subsequent new customer onboarding. Dunamu, the operator of Upbit, used to run brokerage service app “Stock Plus” for many years, which became the foundation that allowed Upbit to speed up the process of introducing high-demand features and services and building a user-friendly UI/UX.
Upbit’s phenomenal growth is well illustrated by the growth of its partner, K Bank. Since the partnership with Upbit in Jun 2020, the number of K Bank’s customers grew exponentially from 2.19M as of end-2020 to 4.8M in 11 months and hit 7M in Dec 2021. Aside from the staggering 3-fold growth within less than a year, the bank’s net interest income soared from KRW 46B in 2020 to 198B in 2021. Subsequently, the results were translated into the bank’s first-ever quarterly net income in 2Q 2021, which was an achievement in just about four years since its inception.
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Yet, it may be premature to conclude that Upbit will keep its grip on the market. As of 2021, Upbit’s domestic market share is over 75%, indicating its dominant position in South Korea’s crypto trading market. The Fair Trade Act in South Korea regards a business entity that holds a market share of more than 50%, or two or three entities that hold a combined market share of more than 75% as a “market-dominant business entity.” Since monopoly/oligopoly has constantly been an issue in the industry, the steady influx of latecomers is likely to change the landscape of the crypto exchange market.
To find out which sector has the most heavily traded projects in South Korea’s crypto exchanges, we divided the sectors of the listed projects into six categories: Layer 1, Layer 2, DeFi, P2E/NFT/Metaverse, Web 3.0, and others.
We analyzed the trading volume of the projects listed on South Korea’s crypto exchanges and found that the most frequently traded projects were Layer 1 projects. A significant number of Layer 1 projects made it into CoinMarketCap’s top 100 market cap list. It turned out that South Korea was no exception to the worldwide popularity of the two largest market cap projects, Bitcoin and Ethereum. Meanwhile, Web 3.0 projects turned out to be heavily traded in Upbit in 1Q 2022. This was due to the relatively higher volume of trades involving BitTorrent (BTT), which took place during a prolonged slump in the global crypto market.
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It is interesting that XRP is more popular in South Korea than almost anywhere else. XRP not only makes it into the top 5 most heavily-traded crypto assets every quarter, but its traded value also represents over 5% of the entire crypto market in South Korea. It indicates that XRP is more frequently traded in South Korea than in other countries, given that XRP represents less than 1% of the traded value of the global crypto market.
4. Act on Reporting and Using Specified Financial Transaction Information: Changes It Has Brought to South Korea’s Crypto Exchange Market4-1. Fewer listed tokens in South Korea’s Crypto Exchanges
As has been discussed already, South Korea is a force to be reckoned with, with its traded value raking third in the world after the U.S. and Japan. According to CoinMarketCap, Upbit’s 24-hour trading volume hit KRW 11T on Sep 1, 2021, earning it the second spot among the 398 exchanges.
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Korean exchanges, however, offer around 200 cryptocurrencies, which is fewer than the number of assets offered by global exchanges, such as Binance (500+ listed tokens) and Huobi Global (400+ listed tokens).
South Korea’s crypto exchanges had carried out a large-scale delisting in the runup to the enforcement of registration of cryptocurrency business that took effect in Sep 2021. In Korea, registering as a KRW-based crypto exchange requires real-name bank accounts since the Korea Federation of Banks views crypto exchanges with a large number of listed tokens as more prone to money laundering.
CoinDesk’s survey of all listed coins from Jan 2020 to Aug 2021 found that the number of trading pairs listed on the four largest crypto exchanges rose from 476 to 749 in just 19 months, up 57%. As the larger
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