Banks rush to fortify partnerships with crypto exchanges

A representation of the virtual cryptocurrency Bitcoin / Korea Times photo by Shim Hyun-chul

A growing number of commercial lenders are seeking to form and renew partnerships with cryptocurrency exchanges, spurred by the diminished overall risk of digital currency custody and trading service providers, market watchers said Wednesday.

Propelling the move is the July implementation of the law governing cryptocurrency, recognizing the exchanges as legal entities under regulatory oversight of traditional financial service providers.

Also coming into play is the greater prospect of corporate financing opportunities, a source of stable and hefty income, unlike retail customer services.

According to the financial market, Bithumb, the country's second-largest local cryptocurrency exchange, renewed its contract with NH NongHyup Bank for only six months. Bithumb is set to ink a new partnership with KB Kookmin Bank.

“We expect synergy with Bithumb,” a KB Kookmin official said.

Bithumb submitted documents to the Korea Financial Intelligence Unit (KoFIU), affiliated with the Financial Services Commission, the country’s financial regulator, to register KB Kookmin as its partner firm last month.

However, the KoFIU denied the request, citing a lack of preparedness in the submitted documents. The two are expected to make another attempt soon after necessary documents are prepared.

The contract between Korbit, a cryptocurrency exchange, and Shinhan Bank will also expire in December.

Korbit is reportedly in the process of formulating a plan to maximize its growth prospects and customer benefits.

Upbit, the country's largest crypto exchange operated by Dunamu, renewed its contract with Kbank, an internet-only lender, for one year, overriding the lender's initial request for a three-year deal.

The decision fanned speculation that the crypto exchange was in search of new partners.

The banks expect that the move will broaden its customer base, encompassing Millennials, those born between 1981 and 1995, and Generation Z, born between 1996 and 2005.

About 60 percent of crypto exchange users are in the age group.

“The partnerships between exchanges and commercial lenders will strengthen, reflecting growing customer needs,” an industry insider said.

Meanwhile, concerns linger over crypto exchanges’ reliance on lenders for funding.

A members of the National Assembly National Policy Committee, Rep. Lee Kang-ill from the main opposition Democratic Party of Korea, said that over 90 percent, or 21 trillion won of Kbank’s funding total of 23 trillion won was sourced from bank user deposits, as of June.

About 4 trillion won, or 20 percent, of the 21 trillion won is drawn from Upbit’s customers.

The lawmaker said Kbank’s heavy reliance on a single source for funding in a bank portfolio was concerning since the lender is using its entire profit to pay interest to Upbit account holders at an annual rate of 2.1 percent.