Conflicts of Interest in Crypto Regulation: Implications for South Korea’s Financial Leadership

South Korea’s crypto market stands at a pivotal crossroads, where regulatory contradictions and conflicts of interest threaten to undermine its potential as a global financial leader. The nation’s dual regulatory approach—where the Financial Services Commission (FSC) champions innovation through crypto ETFs and stablecoins while the Financial Supervisory Service (FSS) enforces an 8-year-old ban on institutional participation—has created a fragmented landscape. This duality not only erodes investor trust but also highlights the urgent need for coherent governance to sustain South Korea’s digital asset ecosystem.

Regulatory Contradictions and Investor Uncertainty

The FSC’s 2025 push for spot Bitcoin ETFs and KRW-backed stablecoins contrasts sharply with the FSS’s continued enforcement of the 2017 institutional investment ban. This regulatory duality has left market participants in limbo. For instance, while the FSC’s suspension of high-risk crypto lending in August 2025 reduced forced liquidations by 40%—boosting retail confidence—its blanket ban on lending services has stifled innovation in risk management tools [1]. Meanwhile, the FSS’s adherence to the 2017 ban has deterred institutional capital, despite the FSC’s phased lifting of restrictions in May 2025 [2].

Political figures further complicate the landscape. Sixteen lawmakers disclosed holdings in XRP and PEPE, raising concerns about conflicts of interest as they shape policies [3]. Such disclosures, coupled with the FSC chief’s public dismissal of crypto’s intrinsic value, underscore a lack of regulatory credibility. This inconsistency has fueled skepticism among investors, with two-thirds of South Koreans expressing concerns about market volatility despite 70% planning to increase crypto holdings [4].

The Cost of Regulatory Fragmentation

South Korea’s regulatory contradictions have tangible economic consequences. The 2024 tax reforms, which tightened capital gains controls, triggered a 3.9% Kospi crash and a 660.3 billion won outflow of foreign capital [5]. This volatility reflects the market’s sensitivity to policy shifts, exacerbated by the FSC and FSS’s inability to align mandates. Academic studies reinforce this: regulatory risk, alongside liquidity and cyber risks, has a negative impact on investor reinvestment intentions, regardless of risk tolerance [6].

The FSC’s recent Q3 2025 guidelines, which allow non-profits and professional investors to trade crypto, represent progress. However, the FSS’s continued enforcement of the 2017 ban remains a hurdle. Without a unified framework, South Korea risks losing its competitive edge to markets like Singapore and El Salvador, where clear regulations have fostered innovation and stability [7].

Pathways to Regulatory Credibility

South Korea’s 2023 Virtual Asset User Protection Act (VAUPA) and the proposed 2025 General Act on Digital Assets signal a shift toward investor protection and market clarity. VAUPA distinguishes between security-type and non-security-type tokens, imposing strict obligations on service providers to mitigate conflicts of interest [8]. The General Act aims to institutionalize the digital asset market by legalizing KRW-backed stablecoins and establishing licensing frameworks, though full implementation is not expected until 2027 [9].

However, challenges persist. The “kimchi premium” (a price gap between Korean and global crypto markets) and fragmented infrastructure hinder institutional adoption. To address this, South Korea must prioritize regulatory coherence, aligning the FSC and FSS’s mandates and accelerating the rollout of institutional-grade infrastructure, such as custody systems and trading platforms [10].

Conclusion: Balancing Ambition and Credibility

South Korea’s ambition to become a global crypto hub hinges on resolving regulatory contradictions and conflicts of interest. While the FSC’s pro-innovation stance and VAUPA’s reforms are steps in the right direction, the FSS’s rigid enforcement of outdated policies undermines institutional confidence. By harmonizing regulatory frameworks and addressing conflicts of interest—such as lawmakers’ crypto holdings—South Korea can rebuild investor trust and position itself as a leader in the digital asset era. The stakes are high: a coherent regulatory approach could attract institutional capital rivaling the U.S. and Singapore, while continued fragmentation risks stalling the nation’s financial ambitions.

Source:
[1] South Korea's Regulatory Clampdown: Reshaping Crypto Investor Confidence [https://www.ainvest.com/news/south-korea-regulatory-clampdown-reshaping-crypto-investor-confidence-market-stability-2508/]
[2] South Korea Breaks 8-Year Ban — Institutional Investors Can Finally Touch Crypto [https://superex.medium.com/south-korea-breaks-8-year-ban-institutional-investors-can-finally-touch-crypto-560f43470621]
[3] South Korean Lawmakers Invest in Crypto While Shaping Market Policy [https://coincentral.com/xrp-news-today-south-korean-lawmakers-invest-in-crypto-while-shaping-market-policy/]
[4] Two-thirds of Koreans Want to Invest More in Crypto as Won-Based Stablecoin Hype Builds [https://www.theblock.co/post/360218/two-thirds-of-koreans-want-to-invest-more-in-crypto-as-won-based-stablecoin-hype-builds-survey]
[5] South Korea's Political Crypto HODLers [https://www.ainvest.com/news/south-korea-political-crypto-hodlers-institutional-confidence-regulatory-contradiction-2508/]
[6] Examining the Dynamics of Risks and Investor Risk Tolerance [https://www.sciencedirect.com/science/article/pii/S2666954424000322]
[7] Crypto Asset Risk Report 2025 [https://coincub.com/ranking/crypto-asset-risk-2025/]
[8] Mapping South Korea's Digital Asset Regulatory Landscape [https://www.sciencedirect.com/science/article/pii/S2212473X25000136]
[9] South Korea Digital Assets Market [https://www.trade.gov/market-intelligence/south-korea-digital-assets-market]
[10] South Korea's Political Crypto HODLers [https://www.ainvest.com/news/south-korea-political-crypto-hodlers-institutional-confidence-regulatory-contradiction-2508/]