Seoul Reassesses Banking Requirements for Crypto Exchanges Amid Competition Concerns

South Korea’s financial regulators are undertaking a significant review of how the country’s crypto exchanges operate under current banking mandates. The reassessment, led jointly by the Financial Services Commission (FSC) and the Fair Trade Commission, examines whether existing practices create barriers that disadvantage smaller platforms and stifle market innovation in the digital asset sector.

The Single-Bank Model: Origins and Current Practice

For years, South Korea has operated under an informal framework requiring each crypto exchange to maintain partnerships with a single designated bank for handling fiat currency transactions. While never formally codified in law, this arrangement emerged from the need to comply with Anti-Money Laundering (AML) requirements and customer due diligence protocols. Banks initially adopted this one-to-one structure to manage compliance risks associated with volatile trading platforms.

Under this system, exchanges depend entirely on their banking partner to process won-denominated deposits and withdrawals. The approach created a gatekeeping mechanism that has fundamentally shaped how the market developed, determining which platforms could operate and at what scale.

Market Concentration and Competitive Disadvantages

A government-commissioned research study examining South Korea’s digital asset market structure revealed significant concerns about how the current banking model affects competition. The findings concluded that exclusive banking partnerships concentrate market power among a few established platforms while making it substantially harder for newer entrants to launch operations.

Large exchanges benefit from superior liquidity and faster transaction settlements, advantages that smaller competitors cannot easily replicate. The research emphasized that liquidity pools remain heavily concentrated around dominant platforms, creating a self-reinforcing cycle that disadvantages any startup attempting to capture market share. New platforms struggle not only with user acquisition but also face fundamental obstacles in securing the banking relationships necessary for basic fiat conversion services.

The study’s analysis revealed that applying a uniform compliance framework across all platforms, regardless of their size or risk profile, imposes disproportionate burdens on smaller operators. Researchers argued that regulatory requirements designed for high-volume exchanges can prove unnecessarily restrictive when applied to lower-risk platforms with modest trading volumes.

Toward Flexible, Risk-Proportionate Regulation

Officials involved in the ongoing regulatory review have signaled openness to restructuring how banking requirements are applied across the crypto exchange sector. Government discussions now focus on whether differentiated compliance frameworks could better reflect the varying sizes and risk exposures of different platforms.

According to reports from those involved in policy discussions, regulators are exploring how tiered compliance standards might allow proportionate oversight rather than one-size-fits-all mandates. This potential shift reflects recognition that smaller platforms handling limited volumes present lower systemic risks and may warrant more flexible banking arrangements.

The FSC’s internal analysis suggests that decoupling the exclusive banking requirement could allow competition to flourish while maintaining necessary safeguards. By enabling multiple banking partnerships or alternative settlement arrangements for lower-risk operators, South Korea could diversify trading platforms and reduce the structural advantages currently enjoyed by market leaders.

Crypto Regulation Advances Alongside Banking Model Review

The banking model reassessment occurs within a broader regulatory evolution affecting South Korea’s entire digital asset sector. Lawmakers are advancing the second phase of crypto regulation through the Digital Asset Basic Act, which aims to create a comprehensive framework for virtual asset oversight.

Discussions around this proposed legislation address several complex issues, including the regulatory treatment of won-pegged stablecoins. The framework would permit issuance of stablecoin products, provided that reserve assets are held by authorized custodians. However, policy divisions persist regarding whether a dedicated regulatory body should pre-approve stablecoin issuers before launch.

The legislative timeline extends into 2026, with lawmakers deliberately extending the bill submission deadline to allow time for consensus-building on contentious issues. President Lee Jae-myung has publicly supported the regulatory initiative and pressed officials to finalize the policy structure in a manner that accommodates both traditional financial firms and newer technology-driven platforms.

Officials plan to incorporate the findings from the banking model review directly into the Digital Asset Basic Act framework, ensuring that reforms to banking requirements align with broader regulatory objectives. This integrated approach signals that South Korea views the crypto exchange banking question not in isolation but as a component of comprehensive digital asset policy.

The convergence of the banking model review and legislative advancement reflects a maturing regulatory philosophy—one that seeks to balance innovation in the crypto exchange sector with financial stability and consumer protection. As these processes unfold, South Korea’s approach could establish a model for how other jurisdictions address similar tensions between market access and compliance requirements.