[Gangnam Perspective] Virtual Asset Exchanges Trapped on an Iron Bed

In the house of Procrustes from Greek mythology, there is an iron bed. For passing travelers, it appears to be a place of rest for a single night. For the host, who turns into a robber, it is a tool to force every traveler to fit his chosen length. Even if a person’s height matches the bed, he arbitrarily adjusts the frame so that no one can leave alive. Procrustes’ bed has come to symbolize dogmatism that imposes rigid, one-size-fits-all standards and views. A similar iron bed, stripped of diversity, seems to hover over the financial authorities. Last month, the Financial Services Commission (FSC) presented to the ruling party’s digital asset task force, which is laying the groundwork for the General Act on Digital Assets, a plan to cap the equity stake of major shareholders in virtual asset exchanges at 15–20%. By contrast, the proposal would allow the government, public funds, and banks to hold up to 30%. In effect, it amounts to nationalization. The authorities’ logic goes like this. With 10 million people now holding virtual asset accounts, exchange platforms have grown so rapidly that they function as public infrastructure. Yet control is concentrated in specific major shareholders, raising concerns about privatization and the risk of treating exchanges as personal coffers. Therefore, before bringing them fully into the regulated system, the government believes it must at least install basic safeguards, such as improving governance. After long deliberation, the model that caught its eye was NextTrade, an alternative trading system (ATS) launched in March last year. It is a private company whose shareholders include 34 securities firms and others, but a solid cap prevents any major shareholder from owning more than 15%. However, as a Go proverb warns, “After long thought, a bad move often follows.”
Debate over a new wave of state-controlled finance is already intensifying. Imposing equity limits on major shareholders of private companies not only lacks any legal basis or precedent, it runs counter to the basic workings of a capitalist market. In particular, NextTrade is a subsidiary created through capital contributions from multiple firms, whereas virtual asset exchanges are clearly businesses founded by individual entrepreneurs. Their ownership structures are fundamentally different. It is almost certain that this will escalate into lawsuits over infringement of management rights and property rights. Moreover, in barely 13 years at most, these firms have pioneered a barren field and grown startups into unicorns. Instead of nurturing them as next-generation financial platforms, the authorities are driving them into a dead end of forced, cut-price equity sales. This will go down as a textbook case of discouraging long-term investment and crushing the will to innovate within the startup ecosystem.
The five largest domestic virtual asset exchanges have been hit by a shock on the scale of Greenland. Initial coin offerings (ICOs) are already blocked. On top of that, they have been bound by a host of shadow regulations with shaky legal grounds, such as strict separation between traditional finance and virtual assets, and restrictions on corporate participation in virtual assets. Now they are told that even their owners may be forcibly replaced—who could have imagined that. The situation inevitably calls to mind former U.S. president Donald Trump’s ambition to annex Greenland, a land of rare earths with a population of about 50,000, under the pretext of checking China and Russia. On the 4th of this month, the heads of exchanges including Upbit and Bithumb rushed together to the National Assembly, while the Korea Internet Corporations Association and the Fintech Industry Association each issued official statements urging the authorities to reconsider the regulations. The industry’s concern is palpable. Even so, exchanges must soberly reflect on the factors that invited such a hostile public gaze. Above all, their internal controls were immature after a period of rapid, short-term growth. Violations of the Act on Reporting and Use of Specified Financial Transaction Information and unprecedented mass mispayments of promotional rewards exposed structural weaknesses. Damaged credibility does not recover overnight. It is also doubtful whether, in proportion to their earnings, they faithfully reinvested to strengthen future growth engines and prepare for risks so they could compete with major global exchanges such as Coinbase. They popped the champagne far too early, staging massive dividend parties and buying up real estate. They must also ask themselves whether they are free from smear tactics and black propaganda aimed at tarnishing rivals. Overall, one can understand the regulators’ concerns, but a radical policy with no parallel even in advanced economies will have serious side effects on the market economy. Instead of equity caps, the authorities should heed experts who recommend tightening fit-and-proper tests for major shareholders and upgrading internal controls and conflict-of-interest safeguards to promote responsible management and innovation. Everyone has their own “iron bed.” Yet most people keep it hidden and are extremely cautious about dragging it out into the open. The reason is simple: it may not be the right answer.
winwin@fnnews.com Reporter