South Korea moves to ban cross trading for crypto exchanges
The move from the authorities is part of a raft of amendments to the country’s Act on the Reporting and Use of Certain Financial Transaction Information.
Cross trading involves offsetting buy and sell orders for the same asset with the same price without recording the transaction on the order book, which is an illegal practice in many jurisdictions.
According to a report by local media outlet Newsis, exchange operators in the country have bemoaned the planned prohibition stating that the move would cause significant disruptions to their already strained operations. Commenting on the practice, an industry official told Newsis:
“In order to convert the cryptocurrency received as a fee into KRW, you have no choice but to sell the cryptocurrency at your place of business.”
Crypto exchanges in South Korea reportedly cross trade to enable them convert fees charged in crypto to Korean won (KRW).
The ban would in theory prevent platforms from being able to transmute these fees from crypto to fiat currency. In effect, the planned ban could mean compulsory zero-commission trading, eliminating the revenue that would have been earned from trading fees.
An anonymous source notes that South Korean crypto exchanges will be forced to create a new business to convert trading fees to fiat currency. However, such a move would come with significant cost implications as the country’s Anti-Money Laundering policies would make such a venture expensive to operate.
Apart from affecting exchange revenues, the move could also pose significant challenges for tax payments. Indeed, withholding tax is levied on exchange trading fees which means that platforms must find means to convert fees received in crypto to won since taxes cannot be paid in cryptocurrency in South Korea.
Crypto exchanges in South Korea could be forced to use the fee payments received in cryptocurrency as collateral to obtain loans for withholding tax payments.
Meanwhile, the FSC is reportedly undaunted by the criticisms espoused by exchange stating that cross trading constitutes a “conflict of interest.” According to the FSC, exchange operators have access to inside information and allowing them to trade against customers could lead to price manipulation.
On the subject of how exchanges will handle fees collected in crypto, the Commission stated, “Whether you want to change cryptocurrency to another asset (other than won) or to keep cryptocurrency, you need to find a solution yourself.”
Apart from the ban on cross trading, the incoming amendments will also see exchanges mandated to hold at least 70% of customer deposits in cold wallets. The provision is reportedly part of countermeasures against crypto exchange hacking with the FSC planning to investigate previous attacks to uncover potential insider involvement.