The Financial Services Commission (FSC) in South Korea has set a deadline for foreign and local crypto exchanges to register as legal trading platforms. The financial watchdog has set a September 24 deadline for exchanges to comply. This requirement is part of an effort to tighten oversight of the country’s exuberant crypto sector. Consequently, nearly two-thirds of all exchanges will have to shut down.

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More than 60 cryptocurrency exchanges in South Korea must notify customers of a partial or total suspension of trading a week before a new regulation comes into effect.

To continue operating, exchanges must register with the Financial Intelligence Unit by September 24, providing a security certificate from the internet security agency. They must also partner with local banks to open real-name bank accounts for customers.

Exchanges that have not registered must shut down services after September 24. While those that have registered but failed to secure partnerships with banks will be prohibited from trading in won.

The FSC has advised exchanges that fail to meet regulatory conditions to inform their customers of any likely closure by Friday, September 17. 

“Should some or all services need to be closed, (exchanges) should notify customers of the expected closing date and procedures to withdraw money by at least seven days before the closure,” the Financial Services Commission said earlier this week.

Almost 40 of South Korea’s estimated 66 crypto operators are set to suspend all services. According to The Korea Herald, as of Friday, only 28 exchanges have the appropriate system designated by authorities designed to proactively limit any security breaches.

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Just four exchanges – Upbit, Bithumb, Coinone, and Korbit – have registered. They have also secured partnerships and, therefore, have permission to make won settlements. These happen to be the four exchanges dominating crypto trading in South Korea. They account for more than 90 percent of the country’s total trading volume.

Some smaller exchanges including ProBit, Cashierest, and Flybit have already said they will end won trading. And that they will continue operations involving only digital coin trading until securing partnerships with banks.

South Korea is one of the world’s biggest digital currency markets. However, two-thirds of South Korea’s cryptocurrency exchanges prepare for closure due to the regulatory overhaul. As a result, investors could lose up to KRW 3 trillion ($2.6 billion).

The mass shutdown of smaller exchanges could also eliminate 42 ‘kimchi coins’. They are alternative digital currencies that are listed on local exchanges and traded mostly in Korean won. Kim Hyoung-Joong, a professor and head of the Cryptocurrency Research Center at Korea University, estimated this. Industry data showed that digital coins other than bitcoin made up about 90 percent of South Korean crypto trading, highlighting the market’s highly speculative nature.

“A situation similar to a bank run is expected near the deadline as investors can’t cash out of their holdings of altcoins listed only on small exchanges,” said Lee Chul-Yi, head of Foblgate, a mid-sized exchange. “They will find themselves suddenly poor. I wonder if regulators can handle the side-effects.”

About 20 exchanges have met some of the regulatory conditions and have the approval to offer crypto-to-crypto trading services. But some have said the operators would still struggle for survival, given the limited size of their business.

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“Huge investor losses are expected with trading suspended and assets frozen at many small exchanges as customer protection will not likely be the priority of those exchanges facing an imminent closure,” said Cho Yeon-haeng, president of Korea Finance Consumer Federation.

The regulations will also affect global exchanges offering won trading. The FSC has sent a notice to 27 foreign crypto exchanges that run operations for Korean traders.

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