Concerns mount over Kbank’s high share of coin exchange deposits

[Courtesy of Kbank]

South Korea’s Kbank high share of coin exchange deposits is under scrutiny amid worries about crypto-focused banks after the downfall of U.S. bank Silvergate in March 2023 following the collapse of the FTX cryptocurrency exchange.

According to data obtained by the ruling People Power Party representative Kim Hee-gon from the Financial Services Commission and the Financial Supervisory Service (FSS) on Monday, the online-only bank’s holdings of customer deposits from coin exchange Upbit amounted to 3.09 trillion won ($2.28 billion) as of August 2023. This represents 18 percent of the online bank’s total deposits, which stood at 17.16 trillion won. Kbank is the affiliated bank for the market-leading Upbit, operated by Dunamu Inc. Coin investors are required by law to have a real-name account at a bank associated with the exchange to conduct coin transactions in Korea.

When comparing the figures at other banks, NH Nonghyup Bank, the affiliated bank for Bithumb, holds a deposit of 557.8 billion won from the exchange, representing 0.2 percent of the bank’s total deposits. At another online-only bank, KakaoBank Corp., deposits for the Coinone exchange stand at 112.2 billion, accounting for 0.3 percent of the bank’s total deposits. Shinhan Bank holds 43 billion won of Korbit’s deposit, which accounts for a mere 0.01 percent, and Jeonbuk Bank Ltd.’s Gopax deposit stands at 4.2 billion won, or 0.02 percent of the bank’s total deposits.

Expressing concerns about Kbank becoming a “virtual asset-focused” bank, the lawmaker emphasized the need for financial authorities to examine the risks that may arise if Kbank uses Upbit deposits as a source of credit loans.

Although virtual asset service providers are obliged to manage customer deposits separately from their own assets for anti-money laundering purposes under the current Korean financial transaction reports act that also covers virtual assets, regulatory gaps still exist due to the lack of detailed guidelines for deposit management.

According to the FSS, NH Nonghyup Bank and KakaoBank currently have separate internal accounts to manage deposits from coin exchanges. On the other hand, Kbank and Jeonbuk Bank keep customer deposits in corporate accounts opened in the exchanges’ names.

Deposits in separate internal accounts grant the bank exclusive access to the deposited funds and are operated in accordance with trust principles, preventing the bank from arbitrarily using the funds. In contrast, corporate accounts allow banks to use the funds as a source of credit loans, raising concerns that it may make it difficult to protect investors in the event of the collapse of the affiliated exchange, according to Kim.

Each bank receives deposit reserves for the purpose of compensating for potential losses. As of the end of September, the amount of reserves at each bank was 20 billion won for Kbank, 10 billion won for NH Nonghyup Bank, 7.3 billion won for KakaoBank, and 3 billion won for both Shinhan Bank and Jeonbuk Bank, according to FSS data. Shinhan Bank’s coin exchange deposit holding, for example, is more than 70 times that of Kbank, but the reserve for losses is only 6.7 times higher for Kbank compared to Shinhan Bank.

At the end of June, the market capitalization of domestic virtual assets hit 28.4 trillion, a 46 percent increase compared to 19.4 trillion at the end of 2022, according to data for the first half of this year revealed by the Korea Financial Intelligence Unit on Monday.

The total operating profit at the 35 domestic exchanges increased by 82 percent compared to six months ago.