The incident has heightened regulatory scrutiny over how digital assets are listed and traded on domestic platforms, forcing financial authorities to re-examine existing legal frameworks that strictly prohibit traditional market-making activities. As policymakers work to shape a comprehensive regulatory environment for the country’s rapidly evolving crypto sector, the debate over market efficiency, investor protection, and structural liquidity bottlenecks has taken center stage in Seoul.
A Stablecoin Surge Ignites Regulatory Concern
The catalyst for the FSC’s re-evaluation occurred on September 17, when major South Korean cryptocurrency exchange Upbit opened trading for JPYC, a prominent yen-backed stablecoin. Under normal market conditions, a stablecoin designed to track the value of a fiat currency should maintain a tight tether to its underlying asset. However, the debut of JPYC on Upbit painted a dramatically different picture.
The asset opened trading at 12 Korean won per JPYC before experiencing a violent upward trajectory. Just an hour after the market opened, the price of the stablecoin surged to a staggering high of 37.6 Korean won. This peak represented more than four times its actual market value and true peg.
Market analysts and exchange monitors quickly attributed the extreme price dislocation to severely limited initial liquidity on the order books. Because there were not enough assets available to absorb immediate buying pressure, early demand heavily distorted the price, leaving unprepared retail traders vulnerable to sudden and dramatic market swings.
The FSC Responds to User Losses and Market Inefficiencies
Addressing the incident publicly, Yoo Young-joon, director of digital finance policy at the FSC, acknowledged the severity of the market distortion and its aftermath. Speaking at a conference in Seoul, Yoo signaled that the regulatory body is now looking closely at structural solutions to prevent similar episodes from happening in the future.
"We will also review the need to introduce systems such as market-making activities to increase the efficiency and stability of the digital asset landscape," Yoo stated during the conference. He further emphasized that regulatory intervention is becoming increasingly urgent due to public backlash and consumer harm. "There were also criticisms that user losses occurred from the price surge after the JPYC listing, so demands for discipline in this area are expanding."
The commentary from high-ranking financial officials indicates a significant shift in tone. South Korea’s current legislative framework governing the digital asset sector—specifically the Virtual Asset User Protection Act—does not include an exemption for market-making from its strict market manipulation provisions. Because providing liquidity through automated quoting or inventory management can legally mimic aspects of artificial price influence, institutional market makers have been entirely locked out of South Korea’s crypto markets. Yoo’s recent statements suggest the FSC is now seriously reconsidering whether a carefully regulated carve-out is necessary to safeguard the integrity of the market.
Academic Debate and Long-Standing Liquidity Concerns
The dilemma surrounding market makers is not entirely new to South Korean financial circles. For months, local academics, legal scholars, and industry researchers have debated whether the rigid prohibition against market-making causes more harm than good by exacerbating illiquidity.
In a 2024 peer-reviewed paper published in the Seoul Law Review, KB Securities researcher Lee Min Jung examined the regulatory stance on crypto market making. She noted that regulators previously maintained their ban because standard market-making practices could potentially be construed as market manipulation under existing financial laws. While Lee argued in her paper that introducing market makers at that particular time might have been premature due to ongoing concerns over manipulation and oversight, she also suggested that regulators should remain open to establishing a formal carve-out once the broader market matures and stabilizes further.
However, other researchers have argued that waiting for stability is a self-defeating strategy, given that the lack of liquidity itself is the root cause of high volatility. Prior to the recent JPYC pricing anomaly, a research paper authored by Yoonyoung Choi from the Korbit Research Center pointed out that the domestic cryptocurrency market had been suffering from serious, systemic liquidity problems.
Choi argued that the total absence of a formal market-maker framework naturally leads to wide price discrepancies, fragmented order books, and extreme volatility. As a prime historical example of structural inefficiency within South Korea’s digital asset ecosystem, the paper referenced the famous "Kimchi premium"—a persistent phenomenon where cryptocurrencies trade at a higher price on South Korean exchanges compared to global exchanges due to localized supply and demand imbalances.
Broader Regulatory Efforts and Unresolved Legislation
The discussion surrounding market-making systems and exchange liquidity unfolds against the backdrop of a much larger, ongoing effort by South Korean authorities to construct a comprehensive regulatory framework for the entire cryptocurrency industry.
The FSC announced plans in July to introduce a consolidated Digital Asset Basic Act. This sweeping piece of legislation is intended to cover stablecoins and the broader cryptocurrency market comprehensively, establishing clear rules for digital asset business operators, centralized exchanges, mandatory disclosures, and internal corporate controls.
Despite the FSC’s proactive stance, lawmakers in South Korea have yet to finalize several critical aspects of the proposed legislation. Among the most contentious and heavily debated topics are the specific regulatory requirements and compliance mandates that will govern won-denominated stablecoin issuers. As regulators attempt to balance innovation with rigorous consumer protection, incidents like the JPYC price surge serve as stark reminders of the structural vulnerabilities still present in the market, adding fresh urgency to the legislative process in Seoul.
