K Bank, the second-largest digital bank in Korea, has delayed its planned IPO. This should be a warning sign to CEOs and backers of other digital banks in the region, not to mention regulators. The likeliest reason behind K Bank’s reticence is its exposure to crypto.
More digital banks in the region are embracing crypto in various ways. Some of these are about infrastructure and building market access to the underserved customer. Others may play more nakedly to helping gamblers scratch their itch.
In Hong Kong in November, ZA Bank became the first Asian bank, digital or otherwise, to offer crypto trading services for retail customers. In partnership with HashKey Exchange, the bank allows customers using its app to transact in and out of Bitcoin and Ethereum.
It’s not the only one experimenting with digital assets: Mox Bank offers crypto ETFs, while back in 2022 livi Bank launched an NFT collectible that was designed to serve as currency in ‘the liviverse’. (DigFin couldn’t find evidence online that this metaverse still exists.)
In the Philippines, Maya Bank offers crypto transfers and trading in its app. UnionDigital Bank secured a license to follow suit, although it’s been quiet on that front since. But Tonik and UNO Digital Bank have also expressed their intention to offer in-app crypto services.
Digital banks in Singapore are unlikely to follow suit, although DBS operates a crypto exchange. Thailand is expected to license its first all-digital banks this year, and some local players such as SCBX – an arm of Siam Commercial Bank – and KBank (as in Kasikorn; not to be confused with K Bank in Korea) are keen experimenters. Indonesia may also get crypto-friendly regulations too.
Digital banks are becoming exposed
And in South Korea itself, the leading digital bank, KakaoBank, has a partnership with crypto exchange Coinone, allowing the exchange’s customers to access the bank’s deposit accounts.
All of this is to show that several digital banks are moving aggressively into crypto services. This makes sense because traditional banks remain shy, and for new institutions looking to grow fast and differentiate themselves, crypto seems like a good fit.
However, that strategy assumes there won’t be any blowups, especially the kind that connect the crypto and the traditional worlds, in terms of market impact, financial stability, and regulatory integrity.
Which is why the industry – both tradfi and crypto – should be concerned about what’s unfolding in Seoul.
Crypto dependence
This is not the first time K Bank has put its IPO on hold. But it has promised its investors that it will go public by 2026. With that deadline looming closer, K Bank is choosing to pass on a relatively stable window opening in markets. It will have to accept what the market gods offer next year.
The digital bank didn’t say why it had postponed going public. Its finances are in OK shape. But those are the finances in its statements that we can see. It may have exposures that we can’t.
K Bank has an unusual dependence on crypto. It developed a bank-account network to accommodate crypto businesses, akin to Silvergate Bank in California. Silvergate closed (or was forced to close by US authorities) in the wake of the 2023 collapse of Silicon Valley Bank. Silvergate ran a network of on/off ramps for many crypto exchanges and had more than $12 billion of crypto-related deposits.
K Bank has a strategic relationship with Korea’s largest crypto exchange, Upbit. Upbit places $2.7 billion’s worth of user assets on deposit at K Bank. This now accounts for about 20 percent of K Bank’s total assets, although some reports suggest the bank’s exposure to crypto is much higher.
Sizing it up
K Bank isn’t the only Korean bank to do this. So do traditional lenders such as Shinhan Bank and NongHyup Bank; last year, KB Kookmin Bank joined the party.
These arrangements expanded last year as banks sensed it was becoming less risky to offer digital-asset custody and trading services. In June 2024, Korean law recognized crypto exchanges as legal entities, subject to regulatory oversight.
But K Bank’s exposure is relatively bigger, and its reliance on crypto customers for deposits is systemically large. Indeed, according to Korean lawmakers troubled by the bank’s situation, all of its profits are going to paying interest to Upbit customers’ deposit accounts.
Wagging the dog
As licensed retail banks intertwine with crypto, which partner is influencing whom? Is the role of banks helping crypto exchanges operate more as traditionally regulated financial institutions, thus paving the way for mainstream adoption of crypto? Or is the lure of crypto’s fast but fickle riches corrupting these banks?
On balance the evidence suggests the latter when crypto becomes such a large part of a bank’s balance sheet.
Silvergate was badly impacted by the collapse of FTX in 2022, which sent both its stock price and its deposit numbers plummeting (to $3.8 billion, about a 60% decline in rapid time). Crypto industry folks are highly critical of the US government’s closing of Silvergate the following spring, saying the SVB collapse gave anti-crypto regulators the excuse to shut it down. But Silvergate was already wobbly; a controlled liquidation may have been better than a messy implosion.
Out of the frying pan…
In K Bank’s case, the digital bank has come under fire by some Korean legislators for its ties to Upbit. Earlier this month, Korea’s Financial Services Commission suspended Upbit’s trading activities, for allegedly breaching know-your-customer and anti-money laundering laws. Upbit is also being investigated by the FSC for illegal ties to overseas, unregistered crypto exchanges.
This is probably why K Bank has halted its IPO. Its strategic partner, instead of adopting banking practices around KYC and AML, is alleged to have flouted those rules, onboarding more than 500,000 users without proper checks. The FSC is also questioning Upbit about operating illegally with overseas crypto exchanges – which, if true, would expose K Bank to huge unknown risks.
The FSC could suspend user withdrawals from Upbit, bar it from onboarding new customers, and even fine its management (Upbit is operated by a company called Dunamu). Other crypto exchanges in Korea are also wondering if they will be investigated too.
This will worry other players, as Upbit had a reputation for being the most compliant among them, agreeing to register with the FSC and introduce KYC procedures. It should also concern K Bank: what kind of due diligence have they done on their partner?
…into the fire
There is another aspect to this relationship that resonates specifically within Korea. One legislator accused K Bank of being Upbit’s “private treasury”.
Korean business is dominated by powerful chaebols. In the 1990s these groups also owned commercial banks, which were treated as captured entities that extended loans to their owners. The huge size of these debts – made on shaky lending criteria – only became clear in the spring of 1997, just as Southeast Asia was tipping into crisis. Korea went down too.
One lesson was laws to forbid commercial groups from owning banks. So when politicians describe a bank as someone else’s “private treasury”, they are evoking this painful history. K Bank is owned by KT, the national telecom company.
Lessons beyond Korea
The K Bank/Upbit situation is relevant for other digital banks around the region that are moving aggressively into crypto-related services. The lesson is that if licensed entities with retail deposits are going to get into bed with crypto exchanges, they need to double down on compliance, and be realistic about the costs and obligations. Banks can’t be allowed a free pass just because of “innovation”.
Crypto players that want to work with banks, within a regulated environment, should also be concerned. Flagrant violations of financial regulations add to the industry’s troubled reputation and will make it harder for legitimate operators to open banking accounts or find partners.
The most obvious regulations that need revisiting is the scope of a bank’s exposure to crypto. Too great an exposure to such a volatile asset is a problem. K Bank’s salespeople have garnered high commissions for onboarding Upbit customers. The bank’s board of directors has failed to ask whether there is a point at which this becomes a danger to the institution.
These exposures, both direct and indirect, need to be assessed, audited, and reported – and thresholds and limits must be put in place.
