As the crypto bear market drags on, the consequences of what has been termed Crypto Winter continue to spread across the globe, especially in South Korea, a known hotbed of cryptocurrency trading and popularity.
Recent reports detail a level of carnage that matches in many ways the decline in market values over the past year. Major exchanges are reporting daily volume drops on the order of 50% to 90%, while smaller exchanges have been hit even harder.
There have been similar effects noted in other major markets, as well, including the United States, Japan, and Switzerland, but the intensity level in South Korea has been off the charts. Exchanges have had to deal not only with rapidly declining volumes, but also with a host of changes in government regulations and demands that the industry enhance security protocols and the monitoring of potential AML violations. There have also been two high-level executive convictions related to wash trading, a practice that generates fake volume data, illegal profits for exchanges, and must be ended.
Budget resources may be constrained, but crypto exchanges, although in their infancy, cannot abandon much needed improvements. One exchange executive laments:
The pace at which exchanges are addressing core problems this year is not as fast as previous years. The sentiment around the crypto sector remained negative when the government of South Korea refused to get involved. Now, the government is putting in efforts to improve investor protection and the structure of the local market.
There have, however, been positive developments. Bithumb, Upbit, Corbit, and Coinone have agreed to cooperate in cracking down on illicit money laundering activities, by sharing data for suspicious transactions and related address designations. A joint press release from the group stated that:
The joint AML initiative is expected to produce significant results as all four exchanges currently employ effectual user protection and fraud detection practices.
There is also a secondary issue that could have longer-term impacts. Startups are having a difficult time in their fundraising efforts, as investors have second thoughts about putting capital at risk in this space. In a few instances, deals have fallen apart at the last minute when the lead investor had a change of mind.
Barry Silbert, the founder and CEO of Digital Currency Group (DCG), explained:
We’ve seen half a dozen fundraising deals fall apart over the past month after the lead pulled out. All is not well in crypto VC investor land. Good time to remind founders that a signed term sheet does not equal cash in the bank.
Trading volumes for Bitcoin and Ethereum have not been as heavily hit, but exchanges make their money on transaction, withdrawal, and order fees, all tied to volume. The volume drops have necessarily cut deeply into margins and turned profits to losses, especially for smaller exchanges. Firms are now considering staff cutbacks, potential consolidation deals, or even shuttering their doors entirely.