Cryptocurrency Crackdown: South Korea Targets OTC Markets in Billion Scandal

South Korea is increasing regulatory scrutiny amid a surge in illegal activities related to the over-the-counter (OTC) cryptocurrency trading market. Financial regulators in the technologically advanced nation are aggressively delving into the Asian country’s largely unregulated world of over-the-counter cryptocurrency trading.

Specific regulatory measures are urgently needed amid growing concerns that money laundering and other illegal activities could be misused, the report said.

OTC cryptocurrency exchanges face increasing pressure

According to local news reports, in a discussion titled “Criminal Legal Issues Related to Virtual Assets,” major regulators including Deputy Chief Prosecutor Ki No-Seong and Financial Services Commission’s Park Min-woo highlighted unregulated OTC Potential sources of danger in the cryptocurrency industry.

Mr. Ki No-Seong emphasized the importance of regulating suspected illegal OTC crypto entities. No-Seong said these companies often operate out of the country and facilitate unauthorized exchanges of virtual currencies into South Korean won or other global currencies.

The main problem is that these entities operate without formal registration, circumventing South Korea's established trade business norms.

Unlike official government-sanctioned exchanges, over-the-counter cryptocurrency markets operate in the shadows. The report said that while leading regulated crypto platforms in South Korea, such as Upbit, handle around 192 digital currencies, OTC platforms have a roster of as many as 700.

These platforms, including peer-to-peer (P2P) exchanges, allow users to trade outside the purview of existing regulated platforms.

Case that prompted calls for stronger regulation

Illegal trading through OTC platforms has not gone unnoticed. One prominent case highlighted in the report involves the International Crime Investigation Division of the Incheon District Prosecutor's Office.

Three people were arrested and charged for engaging in unauthorized foreign exchange business between October 2021 and October last year.

The individuals allegedly purchased digital currencies worth US$70.9 million (94 billion won) from foreign OTC platforms on behalf of Libyan clients. These assets were subsequently liquidated into cash within South Korea.

The scope of these illegal transactions is not limited to isolated incidents. The Korean Customs Service provided a broader picture, estimating that the value of illegal foreign exchange transactions through digital currencies will reach $4 billion (5.6 trillion won) in 2022.

In particular, customs data showed that the total value of financial misconduct soared from 3.2 trillion won ($2.5 billion) in 2021 to 8.2 trillion won ($6.2 billion) the following year.

Nearly 70% of illegal financial activity tracked by officials involves cryptocurrency transactions. Interestingly, according to the report, the total amount of digital currency seized was $4.3 billion, but it came from only 15 transactions.

The main purpose of these operations is to buy overseas digital assets and then sell them domestically, taking advantage of South Korea’s regulatory environment, which often results in higher prices for foreign cryptocurrencies for local buyers.