Problems of the South Korean Crypto Exchange Market
Could a new paradigm emerge in the stagnant exchange market?
TL;DR
Upbit dominates the domestic cryptocurrency exchange market with a market share of more than 80%, and the market environment is becoming somewhat stagnant. However, healthy competition in the market is essential for the growth and innovation of the industry.
Currently, the South Korean cryptocurrency exchange market has lost momentum, with all exchanges except Upbit posting operating losses and most of the crypto market exchanges being completely undercapitalized. As a result, the competitive environment in the domestic exchange market is difficult to sustain, and the market dynamics are declining.
In addition, the entry of global exchanges into the Korean market was expected to revitalize competition, but the strict regulatory environment has restricted their market entry. Therefore, it is unlikely that innovation and competition in the industry will be stimulated in the short term.
1. Introduction
The South Korean cryptocurrency market is dominated by Upbit, which commands more than 80% of the market share. This dominance has solidified over time, creating a market structure that is highly entrenched. Despite this, it is widely recognized that robust competition is crucial for fostering growth and encouraging innovation within the industry. This report delves into the competitive dynamics of the Korean cryptocurrency exchange market and explores the potential for a transformative shift in this increasingly stagnant landscape.
2. Status of Korean crypto exchanges
Initially, Bithumb held a dominant position in the domestic cryptocurrency exchange market. However, the landscape shifted dramatically in 2018 with the rise of Upbit. The introduction of a real-name system for cryptocurrency transactions significantly redistributed market share to the top five Korean currency exchanges, marking a pivotal change in the industry's competitive dynamics.
This shift centralized significant trading activity around the five major Korean won exchanges—Upbit, Bithumb, Coinone, Korbit, and GoPax. These exchanges then engaged in intense competition, employing aggressive marketing strategies, rapidly listing numerous cryptocurrencies, and at times, adopting fee-free policies to attract users.
However, the once fierce competition in the cryptocurrency exchange market has begun to subside. This is partly due to market consolidation, with Upbit now commanding a dominant market share of over 80%. Additionally, all other fiat exchanges have seen a decline in business performance, which has hampered their ability to compete effectively. In 2023, all KRW exchanges, apart from Upbit—namely Bithumb, Coinone, Korbit, and GoPax—reported operating losses, eliminated free trading fees, and significantly cut back on marketing expenditures.
The situation is even worse for crypto market exchanges without a KRW market. According to the Financial Intelligence Unit's (FIU) 'Survey Results of Virtual Asset Businesses in the First Half of 2023', 10 out of 21 crypto market exchanges reported zero transaction fee revenue. Furthermore, these exchanges are completely undercapitalized and have lost their growth momentum. This shows that the monopolization of the domestic cryptocurrency exchange market has further reduced competition and diminished dynamism.
3. Korean market entry for global exchanges
The South Korean cryptocurrency exchange market, once fiercely competitive, is now experiencing a significant lull and urgently requires new impetus. Upbit's monopolistic position has curtailed competition, reducing it to short-lived and superficial efforts like airdrops and marketing campaigns.
In this context, the market is desperately seeking fresh stimuli and transformative changes. The anticipated entry of global exchanges like Binance into the Korean market has sparked hopes for revitalization. These international platforms, known for pioneering innovations in the Web3 industry—such as crypto-based payment services and the development of ecosystems using self-issued tokens—promise to infuse new energy into the stagnant market. However, the stringent regulatory environment poses significant challenges for these global exchanges. For instance, the market entries of Gopax and Crypto.com have been indefinitely delayed due to regulatory hurdles, illustrating the difficulties faced by new entrants in navigating the South Korean regulatory landscape.
Global exchanges face significant barriers when attempting to enter the Korean market, largely due to stringent regulations or the absence of clear operational guidelines. Specifically, exchange-issued tokens are likely to come under direct scrutiny with the upcoming implementation of the Virtual Asset User Protection Act in July, which categorizes their usage as unfair trade practices. Additionally, introducing global exchanges into a domestic market that has not fully stabilized poses further risks, potentially exacerbating existing issues. This concern is underscored by a 49% increase in domestic cryptocurrency suspicious transaction reports (STRs) in 2023 compared to the previous year. Consequently, regulators are compelled to adopt a more cautious and conservative approach regarding the entry of global exchanges into the market.
4. The Korean crypto market is becoming the Galapagos Islands
The domestic cryptocurrency market in South Korea is grappling with significant challenges that hinder active competition, primarily due to Upbit's near-monopoly status and the stringent regulatory framework enforced by the authorities. If these conditions persist, the market risks becoming increasingly closed and stagnant.
Of course, Upbit's market dominance is not in itself a barrier to progress. Upbit's extensive resources and deep market experience could be leveraged positively to spur market development. This is also seen in global markets; for instance, Coinbase in the U.S. holds over 50% of the market share and Bitkub in Thailand nearly 95%, yet both are heavily invested in nurturing the Web3 ecosystem. Specifically, Coinbase has contributed to projects like Base, and Bitkub has developed the Bitkub Chain. Additionally, both platforms are actively involved in educational initiatives aimed at energizing the ecosystem, demonstrating how dominant players can indeed drive substantial industry growth.
This shows the importance of leadership for the development of the industry. South Korea, on the other hand, has deviated from this global trend and is becoming a Galapagos of the crypto market.
In stark contrast to the insular tendencies of South Korea's crypto markets, global exchanges are making significant inroads into local markets around the world. For instance, in Thailand, Binance has collaborated with the local conglomerate Gulf to launch a new exchange, while in Hong Kong, major platforms like OKX and Crypto.com are advancing through the licensing process. Furthermore, these global exchanges are also expanding into other Asian markets, including Japan and Indonesia, demonstrating the positive impacts of openness and competitive dynamics on the growth and innovation of the industry.
5. Conclusion
To rejuvenate the domestic cryptocurrency industry, it is crucial to encourage competition by facilitating the entry of global exchanges into the South Korean market, along with Upbit’s leadership in the industry. Such a strategic move is essential to break away from the current stagnation and closed market conditions, paving the way for a vibrant and healthy Web3 ecosystem.
The cryptocurrency exchange business was initially anticipated to drive industry development and innovation, supported by a clear and effective revenue model. However, most domestic exchanges have become entrenched in a battle over fees and promotional events, diverting their focus away from substantive industry development. This has led to a market characterized by consumptive competition, which in turn is draining the industry of its dynamism and potential for growth.
In contrast, global exchanges are expanding their horizons beyond basic trading operations, incorporating crypto-based payment systems and Web3 infrastructure into their business models. These exchanges are not just facilitating transactions; they're envisioning a future where they function as global financial institutions powered by blockchain technology. Additionally, they are actively contributing to the industry's growth by investing in the Web3 ecosystem through dedicated funds.
While the entry of global exchanges into local markets is not strictly necessary for market development, the extensive experience and resources they offer are likely to invigorate local economies. Their involvement is anticipated to introduce much-needed diversity into markets that have become overly insular, like the "Galapagos" of domestic exchanges. This influx of global perspectives is expected to stimulate healthy competition and inject a new vibrancy into stagnant markets, paving the way for innovation and growth.
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