South Korea's encryption great escape: the outflow of capital, enterprises, and talent

Summary of Key Points

• The high volume of cryptocurrency trading in South Korea has attracted global attention, but the lack of clear regulation and guidance has hindered the industry's development.
• The government prohibits opening real-name accounts for enterprise cryptocurrency trading. This restriction, combined with a vague regulatory framework, has led to talent, capital, and enterprise outflows, weakening the competitiveness of the Web3 ecosystem.
• As the global Web3 industry is expected to develop rapidly under the leadership of the Trump administration, South Korea must reform its regulatory policies to ensure the long-term sustainability of this industry.

1. Background

The inauguration of crypto-friendly President Trump and the establishment of the Crypto 2.0 TF by the U.S. Securities and Exchange Commission (SEC) will accelerate the structural change in the global Web3 market. This is a key turning point. Talent, capital, and enterprises may migrate to countries with sound regulatory frameworks, while the outflow from countries with regulatory uncertainty will intensify.

2024 Capital Inflow/Outflow Situation in Various Countries, Data Source: Henry & Partners

South Korea is also part of this trend. According to the 2024 Private Wealth Migration Report by Henry & Partners, South Korea ranks first in Asia in terms of high net worth individuals immigrating. Economic, social, and cultural factors are driving this wave of immigration. Although not directly related to the Web3 industry, these individuals often serve as canaries in a coal mine, signaling changes in a country's business environment.

In this context, it is crucial to re-examine the Web3 industry in Korea. This report explores the flow of capital, enterprises, and talent in the Korean Web3 market, as well as the key challenges that the industry must address.

2. Capital Outflow: Offshore Exchanges and Accelerated On-chain Transfer

The cryptocurrency market in South Korea is developing rapidly. There are 15.6 million cryptocurrency investors, holding assets worth 73 billion US dollars. The average daily trading volume of cryptocurrency exchanges is now equivalent to the combined trading volume of the Korea Composite Stock Price Index (KOSPI) and the Korea Securities Dealers Automated Quotations (KOSDAQ) market. This reflects the enthusiasm of Korean investors for cryptocurrency assets, driven by low stock market returns and political instability related to martial law.

However, the recent outflow of cryptocurrency assets has reached a worrisome level. During the state of emergency, the service interruption of local major exchanges has undermined people's trust in the stability of these platforms. At the same time, the diversification of investment opportunities provided by foreign exchanges and decentralized finance (DeFi) has further facilitated capital migration.

The 2024 first-half Virtual Asset Service Provider (VASP) survey by the Financial Services Commission of South Korea showed a 2.3-fold increase in funds transfer to foreign VASP wallets. On-chain data confirms this trend, indicating a continued increase in asset migration from domestic exchanges to foreign platforms.

In the long run, capital migration may harm South Korea's Web3 industry. Transaction costs and service income flow abroad, weakening the competitiveness of the local ecosystem and reducing investor protection. This has also raised concerns about the decline in demand for the Korean won and the increase in its value volatility.

3. Migration Tide: relocating headquarters to crypto-friendly countries

South Korea's Web3 companies are accelerating their offshore migration. In 2024, Nexon's blockchain division Nexpace, as well as Klaytn and Line Finschia's Kaia Foundation, will relocate to Abu Dhabi. WeMade's Wemix will relocate to Dubai. The Web3 industry is rapidly shifting to countries with clearer and more favorable regulations.

South Korea faces many obstacles in promoting Web3-related businesses. Companies are unable to open corporate accounts for cryptocurrency transactions, making it difficult to use cryptographic assets. This adds complexity to the monetization of cryptographic assets and creates issues in accounting, taxation, and business operations. For example, in cryptocurrency payment businesses, Company A may receive cryptographic assets from consumers and need to settle payments with the seller in Korean won. Without a corporate account, liquidating assets is almost impossible.

Although South Korea has established a regulatory framework, the lack of specific guidance for stablecoins, DeFi, and Web3 games has restricted industry growth. The country's proactive regulatory approach limits unlicensed activities. In contrast, the global market benefits from regulatory sandboxes that support various pilot projects.

The Trump administration's position on cryptocurrency may highlight this difference, and the favorable regulatory environment overseas accelerates the migration of Web3 companies from South Korea.

4. Talent Drain: Weakening the technological competitiveness of the Web3 industry

Korean Web3 companies moving abroad may have a negative impact on the domestic Web3 talent pool. As the companies move to countries with clearer and more favorable regulations, domestic employment opportunities may decrease, leading to talent outflow. This may hinder the development of the domestic Web3 ecosystem.

Talent migration is not only a problem for the Web3 industry in South Korea. South Korea is one of the countries with the highest proportion of key talents migrating to the United States, especially those with master's and doctoral degrees. This trend is particularly evident in the technology-dependent Web3 industry and may undermine its competitiveness.

In contrast, countries such as the United States and the United Arab Emirates promote the development of their Web3 industry through clear regulations and supportive policies. The unclear regulatory environment in South Korea has accelerated talent outflow, posing a long-term threat to its technological competitiveness and industrial ecosystem.

Challenges and Opportunities for the South Korean Web3 Market in 2025: Regulatory Reform and Industry Growth

South Korea has attracted global attention due to the volume of cryptocurrency trading. However, this volume has not led to industry development, making the country a liquidity channel for global traders. This structure is not conducive to sustainable growth. South Korea urgently needs to make progress in business and technology to strengthen the Web3 ecosystem.

Source: Arthur Hayes

Due to insufficient local innovation and regulatory uncertainty, South Korea is on the edge of the global Web3 development. This excessive reliance on trading volume rather than ecosystem construction has led to the emergence of a 'Korean discount' in the international market.

By 2025, with the new government taking office, significant changes are expected to occur in the global industry. Among these changes, South Korea is at a critical crossroads. Positive measures include allowing cryptocurrency operators to open company accounts, formulating stablecoin regulatory provisions, and advancing cryptocurrency legislation. However, these efforts are just scratching the surface.

To make progress, South Korea must address risks, analyze global policy changes, and develop a regulatory framework that suits domestic conditions. South Korea must shift from solely focusing on trading volume to establishing a sustainable innovation center characterized by excellent business and technological leadership.

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