South Korean exchanges offer excessively high interest rates on fiat deposits! Financial regulators urgently summon exchanges like Upbit and Bithumb to review "deposit usage fees".

In South Korea, most virtual asset exchanges use the "Korean Won" trading pairs. Major exchanges such as Upbit and Bithumb are required to pay bank interest to users for their fiat deposits. Recently, the adjustment of interest rates to 4% by the South Korean exchange Bithumb has raised concerns from the Financial Services Commission (FSC), prompting the regulatory body to demand that all exchanges return to reasonable interest rates.

Users Can Earn Interest! Bithumb in South Korea Criticized for High Deposit Usage Fee Above Benchmark Interest Rate

In South Korea, this is known as a "deposit usage fee," where exchanges pay interest to users at fixed intervals after users deposit fiat currency.

Following the implementation of the "Virtual Asset User Protection Act," the competition among exchanges for rates has intensified. Upbit raised its previously announced rate from 1.3% to 2.1%, Bithumb increased from 2.0% to 2.2%, and Korbit followed suit by raising it to 2.5%. Bithumb went a step further by announcing on the 23rd that the initially announced 2.2% rate will be raised to 4.0%, exceeding the South Korean bank base interest rate for deposits: 2.1% to 3.5% annually, prompting the FSC to urgently convene a review meeting.

According to South Korean regulatory requirements, the "deposit usage fee" should be calculated reasonably by combining the exchange's operating income and incurred costs. However, the FSC believes that Bithumb's method of adding its own funds to pay the usage fee with bank interest does not comply with regulations.

Controversy Over Bithumb's Fee Decision

Bithumb's fee consists of the annual interest rate of 2.0% generated by NH Nonghyup Bank, the operating bank for real-name accounts, plus an additional 2% annual interest rate paid by Bithumb.

However, the reasonableness of such a fee has been questioned. According to Article 5 of the "Regulations on Virtual Asset Industry Supervision," virtual asset operators should establish reasonable standards for calculating deposit usage fees and pay them based on those standards. Ultimately, Bithumb withdrew its decision to raise the fee to 4%.

FSC Urgently Convenes Exchanges

The FSC summoned the heads of the five major virtual asset exchanges—Upbit, Bithumb, Coinone, Korbit, and Gopax—on the morning of the 24th to reexamine the calculation method of deposit usage fees. Authorities believe that each exchange has different views on what constitutes a reasonable fee and need to confirm the calculation standards.

During this meeting, exchanges reported to the authorities which bank products deposits are operated through and the specific calculation method for deposit usage fees.

A person related to a certain virtual asset exchange stated, "Although fee calculation is an inherent right of the exchanges, they are also actively negotiating with banks and have submitted relevant information to the Financial Supervisory Service."

Case of Interest Payment by Upbit

• Deposit rate: 2.1% annually, deposit fee paid to KYC-verified members residing in South Korea

• Deposit fees generated in the previous quarter will be paid every 3 months in January, April, July, and October

• Deposit fees will be paid to the Upbit account after deducting 15.4% withholding tax amount

• Usage fee will be charged starting from July 19, 2024

FSC to Actively Supervise Exchange Rate Policies

The FSC stated that it will continue to closely monitor the rate competition among virtual asset exchanges to ensure that deposit usage fees remain within a reasonable range. This action aims to maintain market order and protect the interests of investors.

In the future, with further implementation of the "Virtual Asset User Protection Act," exchanges will need to handle fee issues more cautiously to avoid unnecessary market fluctuations and regulatory risks.

Experts Say Current Policies Are Somewhat Paradoxical

Jake, founder of South Korean Whitewater Labs, commented, "I find the current regulations a bit strange, but the focus of the new interest rate policy is that user assets are now considered liquid assets. Previously, these assets were considered cold assets, so exchanges did not need to pay interest. But now, since these assets are seen as liquid assets, and exchanges still cannot control them, exchanges need to pay opportunity costs for holding user assets."