rewrite this title South Korea Wants to Cap Crypto Ownership, But Could the Cure Be Worse Than the Problem?

South Korean lawmakers and the Financial Services Commission (FSC) have agreed on a plan to cap equity ownership in domestic crypto exchanges at 20% for major shareholders. This means a single shareholder cannot hold more than that threshold under the new framework.  

The move largely reflects South Korea’s disposition towards how it wants crypto exchanges to operate within its jurisdiction. The bigger question here, however, is whether capping exchange ownership makes the market safer for users without reducing investment, competition, and innovation in South Korea’s crypto industry.

TL;DR:

South Korea plans to cap crypto exchange ownership at 20% per major shareholder to reduce concentrated control and strengthen oversight of dominant trading platforms.
The policy was triggered by concerns over high ownership concentration, operational risk incidents, and systemic risk in a market dominated by a few exchanges handling most trading volume.
While regulators aim to improve governance, accountability, and financial stability, the proposal has sparked industry concerns about investment limits, competitiveness, and innovation pressure in the crypto sector.

What Triggered the Ownership Cap Proposal?

The ownership cap proposal in South Korea was driven by growing concerns about control, risk, and stability in the country’s heavily concentrated crypto exchange market.

Dominance and ownership structure of major exchanges

Regulators were concerned that a few individuals and companies hold very large stakes in exchanges like Upbit, Bithumb, and Coinone, which gives them too much control over key decisions and limits proper checks and balances. 

The current structure of major exchanges highlighted the issue:

Upbit chairman holds 25.5%
Bithumb Holdings controls 73.6%
Coinone chairman holds 53.4%

At the same time, Upbit and Bithumb together handle about 90% of domestic trading volume, meaning just two or three entities dominate most market activity.

Regulatory reaction to operational risk concerns

One of the reported triggers was an incident involving Bithumb, where a promotional error led to 695 users being mistakenly credited with Bitcoin instead of a small cash reward in Korean won. 

Each user reportedly received around 2,000 BTC, worth roughly $135 million per person at the time, bringing the total scale of the incident to about $43 billion in mistakenly credited assets. This drew criticism from lawmakers and raised serious concerns about weak internal controls, poor transaction handling, and overall risk management at major exchanges.

Rep. Kang Min-guk Kang said: 

“The episode is not merely a technical mishap but a case that lays bare deeper structural weaknesses in the virtual asset market, including complacent supervision and gaps in regulation.” This added pressure on regulators to strengthen governance rules.

The proposal is part of a wider effort by South Korean authorities to introduce a new Digital Asset Basic Act that will set clearer regulations for exchanges, stablecoins, and crypto ETFs.

Role of the Digital Asset Basic Act

The Digital Asset Basic Act is being drafted as South Korea’s primary legislation to regulate the crypto industry, covering exchange activities, stablecoins, and related services. The law will provide the necessary legal grounds for regulating cryptocurrency exchanges’ operations, including their governance, risk management, and overall market infrastructure.

In this regard, the proposal to cap ownership stakes in crypto exchanges at 20% is considered a governance rule intended to limit the dominance of influential shareholders. The initiative also serves a broader objective of curbing ownership concentration in crypto exchanges that handle significant trade volumes, while providing more leeway to young firms developing their platforms.

Overall, the Digital Asset Basic Act is seen as legislation aimed at bringing crypto exchanges to the same level as other financial institutions by establishing legal grounds for treating them as regulated financial infrastructure. Nevertheless, the initiative has received substantial backlash from the cryptocurrency industry.

Industry and Market Pushback

South Korea’s largest crypto exchanges have strongly opposed the proposed ownership cap, arguing that limiting shareholder stakes could create more problems than it solves for the industry.

The criticism came from the Digital Asset Exchange Alliance (DAXA), which represents major exchanges including Upbit, Bithumb, Korbit, Coinone, and Gopax. In a joint statement, the group pushed back against the Financial Services Commission’s proposed 20% ownership limit, warning that it could disrupt the current exchange ecosystem and weaken investor confidence.

One of DAXA’s main concerns is accountability. The alliance stated that “major shareholders carry final responsibility for user assets,” and warned that forced stake reductions could remove clear accountability across exchanges. From their perspective, changing ownership structures in this way could weaken responsibility rather than strengthen it.

DAXA also argued that ownership caps could interfere with private business operations and slow industry development. The group warned that the proposal could “impede the growth” of South Korea’s domestic crypto market and reduce the competitiveness of local firms.

Another concern raised is the global nature of crypto markets. Unlike traditional finance, crypto operates across borders, allowing users and capital to move more freely between jurisdictions. DAXA warned that stricter ownership rules could contribute to capital leaving the domestic market and shift user trust toward offshore exchanges.

The alliance also emphasized the impact on innovation and entrepreneurship. It stated that “such rules could damage trust and reduce entrepreneurship across the blockchain sector,” particularly at a time when South Korea is expanding its digital economy.

The proposal was introduced as part of governance measures under the upcoming Digital Asset Basic Act. Exchanges are now urging authorities to reconsider and instead focus on transparent, globally aligned regulations that support both investor protection and market growth. As DAXA stated, “At a time when we should be prioritizing development, destabilizing property rights must be reconsidered”.

How the Cap Affects Stakeholders

The proposed 20% ownership cap could reshape how crypto exchanges in South Korea are owned, controlled, and managed, especially for major stakeholders.

Potential forced divestments or dilution of large shareholders

Current major shareholders whose holdings exceed the 20% threshold are expected to gradually reduce their shareholdings to comply with the new regulation. They may sell shares from their stakes or restructure their holding over the transition period given to exchanges. The rule could indirectly affect how some founders or early-stage investors exit or continue to exert control over the company.

Impact on dominant stakeholders and controlling investors in exchanges

Controlling shareholders or investors of exchanges like Upbit and Bithumb, among others, will have less control over decisions within the firm because they cannot be dominant players in governance. The level of influence of the dominant player can be significantly reduced, since it cannot have a dominant voice in governance decisions.

Governance restructuring requirements for compliance with ownership thresholds

Exchanges might have to restructure their corporate governance systems to comply with changes to ownership ceilings. This could include revising the voting system, ensuring board independence, and ensuring that ownership does not affect management control.

Implications for corporate strategy and capital planning for exchange operators

Exchange operators will have to find new ways to raise capital and attract strategic partners as a result of the imposed ownership restrictions. Equity capital raising will become difficult because large capital increases can easily trigger regulatory scrutiny and push investors above the required ownership percentage.

Increased institutional participation and ownership diversification

With increased restrictions on ownership stakes, exchanges can attract various kinds of institutional investors who can hold smaller shares of equity. These institutions could include fund managers, fintech companies, financial organizations, etc. However, it may also slow decision-making as more stakeholders become involved in governance processes.

Also Read: South Korea Is Using AI To Detect Crypto Market Manipulation

Policy Intent and Regulatory Direction

Regulators have changed their perceptions about the role of crypto exchanges. They no longer treat them as regular private enterprises; they now view them as critical infrastructure for financial systems that could influence the entire financial system. 

Because of this, regulatory bodies are now approaching them as if they were financial entities subject to ownership restrictions similar to those of other businesses. For example, in banking, regulators can block or restrict large acquisitions through approval processes. When someone tries to buy a “significant stake” in a bank, they must get approval once they pass certain thresholds (like 10%, 20%, or 30%, depending on jurisdiction). 

In many financial institutions, no single shareholder is allowed to fully dominate decision-making without regulatory review. Similarly, stock exchanges like the NYSE or Nasdaq also operate under strict ownership and governance rules to prevent concentrated control from affecting market stability. The same principle is now being utilized for the regulation of crypto exchanges by placing restrictions and regulating governance principles.

The primary aim of such an initiative would be to mitigate concentration risks. Some exchanges dominate the country’s overall trading volume. The authorities have to be cautious about the possibility that issues with one exchange can influence the entire market.

Can South Korea Balance Market Stability With Innovation?

The ownership cap represents a turning point in South Korea’s crypto market regulation, yet its effectiveness remains to be seen in future implementation. If this regulation successfully reduces concentration risk, it will improve the stability of the cryptocurrency market. Consequently, this will enhance user protection and align crypto platforms with the regulatory standards of the financial market infrastructure.

Furthermore, the policy represents an important test of South Korea’s competitive advantage within the international digital asset market. Cryptocurrencies are easily transferable assets, and the movement of capital, ideas, and people will depend on how attractive the market is to investors and entrepreneurs. The possibility that the limitations may become too strict may affect plans for the further development of exchange services.

Ultimately, the effect of the regulation will depend greatly on how well regulators strike a balance between exercising sufficient control and maintaining sufficient flexibility.

Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence. 

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