South Korea will ban financial institutions from participating in cryptocurrency activities, and banks will stop serving exchanges

South Korean regulators announced plans to ban banks from participating in cryptocurrency activities, which has led to major domestic banks saying they will no longer provide services for accounts involved in cryptocurrency transactions. Major Bitcoin exchanges in South Korea have been affected, including Bithumb, Coinone and Korbit. Banks that have publicly stated their stance include Shinhan Bank, Korea Development Bank and Korea Small and Medium Enterprise Bank.

Prohibition on cryptocurrency trading

The South Korean government regularly holds meetings to discuss cryptocurrency regulation. On Wednesday, local media reported that regulators plan to ban banks from participating in cryptocurrency activities:

Seoul will ban financial institutions from buying and holding virtual currencies, and they cannot hold them as collateral, the prime minister's office said.

In addition, the media pointed out that "South Korean banks that provide virtual bank account services for cryptocurrency transactions will have to verify the identity of account holders when creating new accounts." Moreover, regulators also plan to prohibit teenagers and foreigners from trading cryptocurrencies, and they will not be able to apply for bank accounts in South Korea.

Virtual bank accounts are set up by traditional banks for cryptocurrency exchange users. To trade on a cryptocurrency exchange, users must first open a virtual bank account and deposit money into it. All major exchanges in South Korea require users to apply for a virtual bank account before they start trading, and Bithumb is no exception. Local media described:

You can only start virtual currency trading after registering on a virtual currency exchange and depositing funds into a virtual account designated by the exchange.

Banks abandon cryptocurrency accounts

On Wednesday, regulators issued their first order to set limits on virtual bank accounts.

Some large state-owned banks and commercial banks in South Korea responded immediately, announcing that they would stop opening new virtual bank accounts for cryptocurrency exchanges. Some even announced the cancellation of existing accounts. According to reports:

Such measures will force traders out of the cryptocurrency market as trading on major exchanges such as Bithumb and Coinone requires users to create virtual accounts.

If the bank closes the exchange's virtual bank account, it will be basically impossible to buy and sell virtual currencies through the bank.

Big banks exit

The banks that have decided to stop creating virtual accounts include Shinhan Bank, Korea Development Bank (KDB), IBK Bank of Korea (IBK), Woori Bank, KB Kookmin Bank, and Hana Bank.

Shinhan Bank, which announced the launch of a cryptocurrency custody service in November, is responsible for creating virtual accounts for Bithumb and Korbit but will not cancel existing accounts.

The state-owned bank KDB announced that it will completely stop all operations involving cryptocurrency transactions, including Bitcoin, starting from January next year.

Woori Bank has taken similar measures to KDB. IBK, Kookmin Bank and Hana Bank have also stopped creating virtual accounts. Nonghyup Bank, whose clients include Bithumb, Coinone and Korbit, has not yet made a statement.