South Korea moves to ban cross trading for crypto exchanges

South Korean crypto exchanges are groaning under a new proposal that will prevent them from converting trading fees to fiat currency.

South Korea’s Financial Services Commission has moved to ban cross trading on crypto exchanges in the country.

The move is part of a raft of amendments to the country’s Act on the Reporting and Use of Certain Financial Transaction Information.

Cross trading, an illegal practice in many jurisdictions, involves offsetting buy and sell orders for the same asset (at the same price) without recording the transaction on the order book.

However, according to a report by local media outlet Newsis, exchange operators in South Korea have bemoaned the planned prohibition stating that the move would cause significant disruptions to their already strained operations.

According to some South Korean crypto exchange operators, the planned move would choke the flow of funds into their platforms.

Exchanges in South Korea reportedly cross trade to enable them to convert fees charged in crypto to Korean won. 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.”

A ban on cross trading 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.

According to the anonymous source, 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.

As a stop-gap measure, 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.

The FSC, meanwhile, is reportedly undaunted by the criticisms espoused by exchanges, 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.”

As previously reported by Cointelegraph, the FSC recently held a meeting with 20 crypto exchanges in the country. At the meeting, several small- and medium-sized platforms intimated the commission about the difficulties faced in carrying out their operations.

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.