Crypto assets should face same regulations as traditional financial system: BOK

The FTX logo and a representation of cryptocurrencies are seen through broken glass in this illustration created on December 13, 2022. [REUTERS]

Crypto assets need to be regulated by the government and central bank with the same standards as the traditional financial system, said the Bank of Korea Thursday.

The collapse of major digital assets and crypto service providers has had a limited impact on the entire financial system, said the Bank of Korea in a report. But their vulnerabilities are related to past traditional financial systems in terms of unstable business models and the use of excessive leverage.

“Crypto asset operators are not regulated for services that are usually regulated when provided by traditional financial institutions,” said Oh Ji-yoon, an economist at the Bank of Korea and one of the authors of the report. “They should be subject to the same regulations if they provide the same services with similar levels of risk.”

Liquidity risks, untransparent financial conditions and leverage were some of the reasons for the collapse of global crypto operators in 2022, including the crash of TerraUSD and Luna coins as well as the collapse of the crypto exchange FTX, hedge fund 3AC and lender Celsius.

“If regulations applied to the traditional financial market were applied on crypto assets, risks wouldn’t have been triggered or damages may not have been that big even if risks were triggered.”

TerraUSD and Luna, co-created by Do Kwon, wiped out around $40 billion last May. Luna once had the ninth-largest market cap with $30 billion.

Keeping up the pace with key countries in crypto regulation is also needed to prevent regulatory arbitrage, the report added. It warned the spread of stablecoin could “affect the safety of the entire financial system, including monetary and payment systems.”

The EU Parliament passed the Markets in Crypto Act, or MiCA, last month, which seeks to lower risks for crypto investors. MiCA is the world’s first comprehensive package of rules aimed at regulating the cryptocurrency industry.

The Korean government is pushing to pass a bill designed to protect investors.

New legislation for crypto passed the National Policy Committee last week. There are 19 proposals that include requiring customer deposits to be placed into segregated deposits.

BY JIN MIN-JI [jin.minji@joongang.co.kr]