Capital Flight Accelerates As South Korea's Crypto Rules Bite

(MENAFN- The Arabian Post)

More than $110 billion in digital assets moved out of South Korea during 2025 as stringent trading restrictions and policy uncertainty pushed investors and firms to seek friendlier jurisdictions, according to estimates compiled from blockchain analytics, exchange disclosures and regulatory briefings. The scale of the outflows has sharpened debate in Seoul over how to balance market oversight with competitiveness at a time when global crypto activity is consolidating around clearer rulebooks.

Financial authorities have acknowledged that tighter controls on leverage, advertising and retail access curbed speculative excesses that had characterised earlier cycles. Yet the same measures also reduced onshore liquidity and encouraged capital migration through offshore exchanges and decentralised platforms that are harder to supervise. Industry executives say the exodus accelerated after the enforcement of tougher compliance requirements on local platforms, including enhanced know-your-customer checks and restrictions on certain token listings.

The policy impasse has been most visible around stablecoins. Officials broadly agree on the need for guardrails to protect consumers and safeguard payments stability, but divisions have emerged over whether privately issued won-linked tokens should be permitted, how reserves should be held, and which agencies should oversee issuance. Those disagreements stalled a wider digital-asset framework that had been expected to give firms certainty on custody, market conduct and cross-border transfers.

South Korea's crypto market remains large by global standards, with high retail participation and deep technical expertise. However, the absence of a comprehensive regime has left exchanges operating under a patchwork of rules while overseas competitors expanded offerings under clearer frameworks in the United States, the European Union and parts of the Middle East. Market participants say the result has been a steady relocation of trading desks, developers and liquidity providers.

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Data compiled from on-chain flows indicate that the bulk of 2025 outflows were routed to global stablecoins and major layer-one networks before being redeployed through international venues. While some transfers reflected legitimate portfolio diversification amid volatile prices, analysts say the persistence of net outflows points to structural drivers rather than short-term market swings. Local exchanges reported thinner order books and wider spreads during several periods of heightened volatility, reinforcing incentives to trade elsewhere.

Regulators contest the characterisation of an unchecked drain, arguing that stronger oversight has reduced fraud and protected consumers following earlier market failures. They point to improved disclosure standards, segregation of client assets and stricter penalties for market manipulation. Officials also stress that capital movements in crypto are inherently fluid and do not equate to a loss of productive investment in the broader economy.

Still, the policy stalemate has prompted calls from lawmakers and industry groups for a reset. Proposals under discussion include a phased licensing regime for exchanges and custodians, explicit recognition of stablecoins backed by high-quality reserves, and a sandbox for tokenised securities and payments use cases. Proponents argue that clarity would bring activity back onshore, improve supervision and enable authorities to track risks more effectively.

Banks and payment firms have taken a cautious stance. Several institutions paused pilot projects linked to tokenised deposits and settlement tokens while awaiting guidance on stablecoins and custody. Fintech executives warn that delays risk ceding leadership in programmable finance to competitors abroad, particularly as global standards coalesce around reserve transparency, redemption rights and operational resilience.

See also IMF warns of stablecoin strain on emerging economies

The political context has complicated progress. With multiple agencies sharing responsibility for financial stability, consumer protection and innovation, coordination has proved difficult. Disagreements over whether stablecoins should be treated primarily as payment instruments or investment products have implications for capital requirements, reserve management and oversight powers. Until those questions are settled, officials have been reluctant to advance a broader bill.

For retail investors, the impact has been mixed. Tighter rules reduced exposure to highly leveraged products and curtailed aggressive marketing. At the same time, access to newer tokens and services has narrowed, pushing some traders to offshore platforms with fewer protections. Consumer advocates say this underscores the need for a domestic framework that combines access with safeguards.

Arabian Post – Crypto News Network

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