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Crypto Funds Regulation in South Korea or How Zeniex Pulled Its Fund Out Of The Big Inspection

Anna Zhygalina

Due to the overheating of the South Korean crypto market, regulators have tightened control over the fight against money laundering and illegal financial activities. As a result of such pressure, the exchange Zeniex, which was opened in May this year, announced its closure on November 9. At the same time it reported the closure of the fund it manages - “ZXG Crypto fund No.1”, which drew the attention of the country's main regulator, the Financial Services Commission (FSC) of South Korea.

Zeniex quits the game

Zeniex exchange has stopped trading, but gave users the opportunity to transfer their digital assets until November 23, and apologized for the unjustified aspirations: "We came to the conclusion that it will be problematic to continue providing our services... we sincerely apologize that we could not meet the expectations of users" — published on the company's website. Meanwhile, the South Korean authorities did not take any action against the exchange itself, which daily trading volume amounted to $410,000 after the announcement of the closure. Although the exchange was not registered with the FSC, the regulators were more interested in the cryptocurrency fund operating without a license.

The “ZXG Crypto fund No.1”, which is managed by a joint venture between China and South Korea, attracted the attention of the Commission and Financial Supervisory Service (FSS) in October. The FSS conducted an analysis of the cryptocurrency transactions on the market and shared the report where the following was stated: "ZXG under Zeniex has not been registered in the Financial Services Commission. And the financial investment guide on their homepage was not audited by the Financial Supervisory Service. The management and sales company, as well as investors, have not received any financial approval".

In turn to this report, the representatives of Zeniex replied, that the exchange was not obliged to register a crypto fund, because there was less than $879,000 (1 billion Korean won) under its management. At the same time, the company does not disclose the final volume of attracted investments. Instead, the exchange said: "We conducted a legal review at the product planning stage and released it without any illegal operations."

Since at that time there was no relevant rules for crypto funds operating, the regulator transferred XZG case to the Prosecutor's office. And at the end of October, the Financial Services Commission published a note in which it obliged cryptocurrency funds to register, report and operate under the country's “Capital Markets Act”. Thus, all crypto funds received a regulatory document, which also gives recommendations to investors.  

Ultimately, a self-proclaimed crypto fund ZXG announced on behalf of its founder, crypto exchange Zeniex: "Dear users. After lengthy discussions, we regret to inform you that we are closing our fund... ZXG Crypto fund No.1 has faced and will face difficulties coming from financial regulators. In this regard, we feel our responsibility, and therefore came to such a difficult decision." At the same time, the company announced that ZXG tokens will be transferred to foreign exchanges, without clarifying how long it is going to continue its operations at all. The website indicated that investors will be notified of further changes by phone or e-mail.

The crypto community believes that ZXG has become the "first sign" of a new sweep of the crypto market in South Korea. However, regulators have strong reasons for the new regulation, which are aimed to protect investors and their capital.

The fake funds are flooding the market

Crypto Fund Research has designated 2018 as the ”year of crypto funds". The company published a market analysis in August this year, which indicates that 466 cryptocurrency funds were founded in the world. According to the founder of Crypto Fund Research Josh GNAIZDA: “We expected a large number of new crypto funds to launch in 2018 to satisfy growing investor demand. However, the pace of new fund launches is a bit surprising given the dual headwinds of depressed prices and less than favorable regulatory conditions in many regions”. At the same time, according to the company report, about half of these funds consisted of up to 5 team members without any significant experience, and their assets were up to $10 million, which did not inspire confidence among investors and regulators. For comparison: in the classic hedge fund, the minimum investment for private investors is $5 million, and corporate - $25 million.

The trend of crypto funds growing up inevitably touched the saturated with cryptocurrency South Korean market. According to our expert, the founder of a multidisciplinary company in Seoul, which develops software for cryptocurrency and blockchain companies, Almir SALIMOV: “Almost every investor creates a website here, calling it a fund, while not registering it with regulators. And there are dozens of such examples, when the team can consist of only 1 person.”

Michael SKOBENKO, crypto analyst and Asian blockchain projects adviser, added that there are no statistics determining the number of such projects in principle: "I can call myself "Misha Fund", make a fashionable website, attract investments under my control with the help of web resources, meetups and even word of mouth. Then I can buy tokens of different projects and wait for them to grow in price, so that I could return it to investors and earn money for myself. And no reporting, of course. Therefore, there is no place to collect any objective analytics.”

It is not surprising that such a flood of cryptocurrency funds has caused increased interest of the FSC. Almir SALIMOV believes that the biggest danger primarily is their inexperience: “Such fake funds can accept assets, while promising the great profitability for investors without being qualified in the crypto market. At the same time, they have already invested in different ICO, and their tokens went down in price, like the whole market did. Perhaps someone began to complain and attracted the attention of regulators”. In addition, understanding the real situation is complicated by the fact that it is not clear how much these funds have left real invested capital, as they have no official reports.

Old traditions will not harm new crypto economics

South Korea's state supervisory services are taking active measures to check the largest and most active players. As a result of a number of reforms, the Cabinet of Ministers of South Korea in August this year excluded cryptocurrency exchanges from the list of venture companies, and after that in September — it did the same with all other crypto companies. At the same time, the main regulators, the Financial Services Commission of South Korea (FSC) and the Financial Supervisory Service (FSS), conducted a number of inspections of crypto exchanges and their bank accounts to detect the money laundering and illegal financial activities.

Oddly enough, the tough position of regulators is supported by many experts. President of the South Korea Blockchain Association Andrew LIM agrees with the exclusion of crypto platforms from the "venture business“, as well as with the need to regulate the entire crypto market, considering that it is too early for privileges: "There are too many uncertainties and volatility in the crypto market. We want less restrictions but self-regulating is not working... at least not yet.. As a community we need to be more concerned about further legitimizing our companies. Crypto companies, that make transactions with digital assets have fiduciary responsibilities they must realize.”

But if the work of crypto exchanges was taken under control by the authorities in June, after a series of inspections on KYC and AML detection, the growth of crypto funds in the country has become a new disaster that needs a strong regulators’ hand. According to Michael SKOBENKO: "Classical funds, such as hedge funds, report to the relevant authorities for each attracted and invested dollar, providing more or less transparent statistics. But here, with the crypto funds - it’s a complete mess.”

Almir SALIMOV sees the solution to this problem with the application of rules and drafts from the traditional financial industry: “Although the cryptocurrency itself is already recognized in South Korea as an asset, the activities of companies, that accept digital assets and promise profitable investments, have not yet been regulated. If the state introduces standards to make this funds be accountable, it will bring more safety to the investing processes.”

The expert believes that the ZXG Crypto fund can not be considered the number 1 fund in South Korea, especially since Zeniex has not got the license for its activities as a financial institution. And the closure of this fund before the audit suggests that South Korea's regulators are moving in the right direction.

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