Korean virtual asset industry opposes the prohibition of sharing the order book

In March 2021, amendments to the Special Financial Information Act that regulates virtual asset business operators are in effect, and a clause prohibiting cross-transaction under the Special Financial Information Act, i.e., prohibiting sharing of order books (trading ledgers), caused the outflow of local wealth. 

Hwang Soon-ho, head of Dunamu External Cooperation Team, who attended the public hearing on the enforcement decree of the Special Act held online by the Korea Financial Information Analysis Institute (KoFIU) on the 1st, “If (order book) partnership is prohibited, investors will go to foreign exchanges.” He pointed out that domestic operators may experience difficulties.

◆KoFIU “It is difficult to achieve the goal of preventing money laundering”, Reasons for prohibiting order book sharing

According to Article 13, No. 4 of the revised bill of the Special Financial Information Act, 'the act of allowing its customers to trade virtual assets with customers of other virtual asset operators through partnerships with other virtual asset operators is prohibited.' This means sharing the order book between exchanges.

Domestic exchanges have used to share order books with overseas exchanges in order to allow transactions of virtual assets that lack liquidity to be concluded. Binance KR shares order books with Binance headquarters, Huobi Korea shares order books with Huobi headquarters, and Upbit also stopped sharing order books with foreign exchange Bittrex.

Hwang said, “The partnership between exchanges has a net function that can prevent a sharp liquidity fluctuation.” Due to the nature of exchanges where several virtual assets are listed, there are cases where the liquidity of certain coins is insufficient. At this time, it is explained that sharing the order book with other exchanges solves the insufficient liquidity problem and allows members to trade conveniently.

However, in order to comply with the law's purpose of “anti-money laundering,” the Special Funds Act banned it. This is because even if domestic exchanges report their business in accordance with the Special Financial Information Act, foreign exchanges that share order books with domestic exchanges are not, so money laundering cannot be completely prevented.

KoFIU Planning and Administration Director Jeon Yo-seop, who attended the public hearing on this day, said, “The reason that cross-transaction (order book sharing) is prohibited is because we cannot properly know the customers of other (unreported) virtual asset providers. It is difficult to report suspicious transactions because they do not know, and it is difficult to achieve the goal of preventing money laundering.”

◆Domestic investors go abroad, pointing out the “local wealth spill” problem

The problem is that if order book sharing is blocked, more and more investors will go to foreign exchanges. This is because investors are looking for exchanges with rich liquidity. For example, if Binance KR stops sharing the order book, it is traded on Binance.

Hwang pointed out that prohibiting all order book sharing is excessive, saying, “Alliances between KYC (real-name customer authentication) business operators or business licensed by other governments do not violate money laundering prevention, which is the purpose of the Special Financial Information Act."

It has also been pointed out that domestic operators can take over the damage caused by non-reporting by overseas operators. In order to do business with domestic investors under the Special Financial Information Act, even overseas exchanges must comply with the law. This is because there is a provision that says, "Even if the transaction is conducted overseas, the law will be applied if the effect has an effect on the domestic market."

However, it is unlikely that foreign operators will abide by domestic laws, and there is no way to prevent investors escaping to foreign exchanges. Therefore, it is pointed out that the domestic exchange is who suffers damage from the provision of the order book sharing ban.

KoFIU's position is to increase its effectiveness so that foreign exchanges can also comply with domestic laws. Director Jeon Yo-seop said, "Because we are in a cooperative relationship with overseas FIUs, we will solve it through cooperation."

On this day, the public hearing ended without any special progress. Currently, it is the notice period for the legislation of the Special Financial Information Act Enforcement Decree, and the KoFIU will receive an opinion on the enforcement decree by the 14th.

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