On August 1, 2024, Korea's Financial Services Commission (FSC) announced plans to implement stricter shareholding limits and disclosure requirements for the equity structure of cryptocurrency exchanges. This comes in addition to the "Virtual Asset User Protection Act," which officially took effect on July 19, and several investigations into exchanges. The cryptocurrency industry is facing the most significant regulatory upgrade since the ICO ban in 2017, marking the official entry of the Korean cryptocurrency market into a new phase of "traditional financial regulation."

Regulatory Actions and Timeline

● Legislation Effectiveness Rhythm:
- July 19: The "Virtual Asset User Protection Act" officially took effect, becoming Korea's first systematic regulation of the cryptocurrency industry, clarifying the legal responsibilities of virtual asset service providers (VASPs) regarding customer asset segregation, insider trading, and fraud manipulation.
- The act authorizes the FSC to collaborate with prosecutors and police for law enforcement, providing a legal basis for subsequent high-intensity investigations and equity restructuring of exchanges.

● Shareholding Limits and Equity Transparency:
- In the latest draft of supporting regulations disclosed by the FSC, it proposed setting limits on the shareholding ratio of single shareholders and their related parties in cryptocurrency exchanges and strengthening the disclosure obligations for cross-shareholding and related enterprise control relationships.
- The regulatory logic is highly analogous to the shareholding restrictions on banks, insurance companies, and securities firms in Korea's traditional financial system, aiming to prevent chaebols or a few major shareholders from manipulating exchange governance and trading rules through complex equity structures.

● Exchange Investigations and Risk Events:
- In the first half of 2024, Korean prosecutors launched surprise searches on several local exchanges, citing reasons including suspected market manipulation, money laundering, and improper review of suspicious projects for listing, with some platform leaders being taken in for questioning.
- Financial regulatory agencies pointed out that some small and medium exchanges exhibit "family-style" or "absolute control by a single major shareholder" structures, lacking independent governance and compliance checks in listing, delisting, and fee policies.

Comparison with the U.S. Model: From Securities Law to Platform Responsibility

● Reference Framework of U.S. Regulation:
- In recent years, the U.S. Securities and Exchange Commission (SEC) has effectively brought a large number of tokens under the securities law framework through enforcement cases and quasi-securities classification, particularly by suing platforms like Coinbase and Kraken, focusing on unregistered securities issuance and underwriting, and matching activities.
- The U.S. Commodity Futures Trading Commission (CFTC) focuses on derivatives, leverage, and over-the-counter trading, taking enforcement actions against platforms like Binance, emphasizing the platforms' compliance screening and anti-money laundering obligations for domestic users.

● Platform Shareholding and Conflict of Interest Management:
- In the U.S., national securities exchanges, ATS, and brokerage platforms involved in proprietary trading, market-making, or related party project transactions must strictly disclose and accept conflict of interest regulation, and in some scenarios, must separate business or limit shareholding.
- U.S. regulatory practices have repeatedly investigated cross-shareholding, kickbacks for listings, and insider allocations between project parties and trading platforms, providing a clear case library for Korea's design of "shareholding limits + information disclosure."

● Pathway for Institutional "Transplant" to Korea:
- Korean regulatory authorities have repeatedly mentioned in public statements that they will reference "U.S. experience in combating market manipulation and conflicts of interest," particularly emphasizing that platforms must not exploit information advantages and shareholding control to gain improper benefits.
- This pathway implies that Korea will not simply resolve issues through "licensing + registration," but is inclined to incorporate mainstream exchanges into a regulatory module similar to that of securities operating institutions, continuously supervising shareholding structures, information disclosure, and conflicts of interest.

Compressing the Space for Chaebols and Single Major Shareholders

● Chaebols' Hidden Layout in the Cryptocurrency Industry:
- Research Brief shows that in the equity structures of several mainstream Korean exchanges, there are high shareholding ratios of chaebol-affiliated funds, family trusts, or related technology companies, with actual control of some platforms concentrated in a few individuals or family businesses.
- Traditional chaebols indirectly hold shares through technology subsidiaries and venture capital firms, participating in early financing and subsequent capital increases of exchanges, thereby gaining significant influence over listing reviews and liquidity distribution.

● Three Major Risk Points of Regulatory Concern:
- Risk of Benefit Outflow: When an exchange is controlled by a single major shareholder or chaebol, there may be instances of providing "fast-track listing channels" for related projects and offering asymmetric resource support in liquidity and recommendation positions.
- Manipulation and Insider Trading Risks: Concentrated shareholding + control of management amplifies the possibility of insider information leaks, pre-arranged price manipulation, or market crashes, which have already appeared in some investigated cases.
- Systemic Reputation Risk: If a leading platform is exposed for "chaebol manipulation + project fraud + user defaults," it will quickly transmit to the entire Korean cryptocurrency market, undermining its compliance image globally.

● Institutional Goals of Shareholding Limits:
- Dispersing Single Control: By setting red lines for shareholding of single shareholders and related parties, exchanges are compelled to introduce more financial institutions and professional investors into equity, diversifying governance structures.
- Enhancing Independence of the Board and Internal Controls: Regulatory requirements strengthen the role of independent directors and compliance officers, avoiding domination of the board by major shareholders, which is beneficial for introducing compliance checks in key decisions such as listing, delisting, and risk control.
- Preparing for Future License Tiering: When shareholding structures and governance frameworks become more transparent and decentralized, regulators will find it easier to implement tiered licensing and differentiated capital requirements based on business types and risk levels.

Direct Impact on Exchanges and Market Structure

● Triple Pressure on Exchanges:
- Pressure for Shareholder Restructuring: Platforms with significantly high shareholding by single shareholders will need to reduce holdings or introduce new shareholders during the transition period if the new regulations are formally implemented, involving negotiations, revaluation, and redistribution of governance rights.
- Pressure for Business Adjustments: Exchanges with deep business ties to major shareholders or related party projects may be required to sort out existing related transactions, revise listing standards, and disclose past benefit arrangements, leading to short-term business fluctuations.
- Rising Compliance Costs: To meet new information disclosure and governance requirements, each platform will need to expand legal, compliance, and audit teams, bringing in external consultants, significantly increasing operational costs.

● Potential Restructuring of Market Landscape:
- Accelerated "Shuffling" of Small and Medium Platforms: Small and medium exchanges with unclear governance structures or highly family-oriented management face the risk of being forced into mergers, exiting the market, or downgrading operations if they cannot meet shareholding requirements within the stipulated time.
- "Financial Institution-like" Transformation of Leading Platforms: Leading exchanges with more standardized shareholding and a willingness to cooperate with regulators are expected to gain higher institutional acceptance and more stable banking partnerships after the new regulations take effect, gradually aligning with "securities firms/brokerage platforms."
- Regulatory Disparities Between Foreign and Local Platforms: Strict local regulations may increase the attractiveness of foreign platforms to Korean users, but against the backdrop of tightening cross-border enforcement and capital control, compliant local platforms will still hold the mainstream fiat entry points and institutional resources.

Bullish and Bearish Perspectives: Safety Premium and Innovation Space Compression

● Optimistic/Supporters: View this as compliance upgrade and governance optimization
- Increased Legal Certainty:
- Supporters believe that shareholding limits and equity transparency requirements will push exchanges from "family businesses" to "compliant financial infrastructure," bringing certainty premiums in terms of regulatory expectations, investor and institutional access.
- User Protection and Trust Restoration:
- In conjunction with the "Virtual Asset User Protection Act" regarding customer asset segregation, cold wallet custody, and insurance mechanisms, the new regulations help reduce the user trust crisis caused by "related party project defaults + platform protection failures."
- Easier Entry for Institutional Funds:
- When platform governance structures are closer to traditional financial institutions, compliant domestic and foreign funds, brokerages, and custodians will find it easier to collaborate, benefiting deep liquidity and product line expansion.

● Pessimistic/Opponents: Worry about limited innovation and excessive regulation
- Regulatory Costs Squeeze Innovation Budgets:
- Opponents point out that the high costs of compliance, auditing, and equity restructuring will compress exchanges' R&D investments in new products, Layer 2 integration, and DeFi access, diluting Korea's position in global cryptocurrency innovation.
- Risk of Chaebol Capital Withdrawal:
- Shareholding limits may weaken chaebols' investment motivation in the cryptocurrency industry, leading to a further tightening of the financing environment for early high-risk projects, with entrepreneurial teams migrating to more "financing-friendly" regions like Singapore and Hong Kong.
- Regulatory Arbitrage and Underground Activities:
- Overly strict local regulations may push some high-risk trading, leverage, and high-frequency strategies towards foreign platforms or on-chain gray areas, misaligning regulatory visibility and actual risk distribution.

Outlook: Can Korea Balance "Strong Regulation" and "Industry Competitiveness"?

In the short term, the market will focus on the final text of the FSC's shareholding limit regulations, transition period arrangements, and substantial restructuring of the equity structure of leading exchanges. Once the rules are implemented, local platforms will enter a painful period centered on "equity restructuring + governance upgrades," with some small and medium platforms potentially being accelerated out of the market. In the medium to long term, this round of policy adjustments is not an isolated event but resonates with the strong regulation in the U.S. using securities law as a lever and the licensing management of cryptocurrency platforms in several Asian countries: compliance and transparency will become new competitive dimensions for leading platforms. However, if regulation lacks "sandbox space" and "innovation exemption mechanisms" at the execution level, Korea may pay the price of lost innovation vitality and international business spillover while enhancing safety and institutional friendliness. Global investors and project teams need to reassess the compliance dividends and innovation discounts of the Korean market, making more refined decisions in regional allocation and platform selection.

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