Global Crypto Market Transition and Future Options in 2021

Hello. This is Charles Pyo of Chain Partners, working hard on a new Changer project these days.

Compared to 2017 when we first started the blockchain business, the regulatory environment has been changed significantly for four years later. At that time, the world was almost unregulated. But now the crypto market has finally become an environment where the business could not go on without caring about regulations.

So today, we’re going to look at how things have changed and what options we have with the new blockchain business as of July 2021. I hope it will help those who are preparing for crypto business or interested in our Changer project to understand the market environment.

Exchanges outside the ring, where their place is becoming narrow

In the meantime, typical C2C exchanges like Binance, Bybit, and BitMEX etc. (Crypto-to-Crypto exchanges that do not deal with legal tender) have had their headquarters at offshore countries like Seychelles, Cayman, and Malta.

Offshore is a term that is distinguished from inshore, and is often called as tax haven. It means countries outside of control that are difficult or impossible to track transaction records and owners, and mainly the Caribbean Sea or small island countries like British territories correspond to this.

Getting a crypto license from the offshore is a piece of cake. There are a lot of countries that let you get a license for only $10,000. But these are in fact meaningless if they are not only for the customers of their country. It is same as becoming illegal to get a licensed realtor from Japan and come to Korea to operate. But so far, most C2C exchanges have been operated that way.

Although Binance, was known to move its headquarter to Malta in 2018, actually it is not known for which country it has the corporate credentials as the Malta government officially denied in the following year. (Usually, offshore exchanges can be easily identified where they are incorporated by looking at the terms and conditions. However, Binance is hard to find any sign of corporate credentials from anywhere in the terms and conditions.)

These exchanges, whose headquarters are vague, have made huge profits from around 2013 to the present with little regulation. However, on June 21, Canada Ontario Securities Commission(OSC) imposed a fine of up to $1 million with an order of business prohibition on Bybit, a crypto currency exchange registered in BVI(British Virgin Island), one of the major offshore company. The OSC also held hearing following Bybit on other offshore exchanges like Poloniex and KuCoin, which are receiving customers in Ontario, Canada to announce a withdrawal.

Surprised by the announcement of Bybit regulations, Binance announced a suspension of operation for Canada’s most populous Ontario customers on June 27, a week after the regulatory anouncement. If the fine for Bybit, which started much later than Binance, is $1 million Canadian dollar(about 920 million won), the fine for Binance will certainly be much bigger. If you read the OSC decision of Bybit, it notifies the violation of the Securities Act on the provision of unauthorized 100x margin to its citizens.

This regulatory trend is highly likely to spread to other developed countries. In June alone, Japanese and British financial authorities warned that Binance has been operating without the permission of their country. Also this month, the same argument began to be made in Korea. The Financial Services Commission has already issued an ultimatum.

What would be the proportion of Korean users in Binance? In fact, I just got an ad mail from Bybit, so I captured it. As of February this year, 300,000 out of 1.5 million customers are Korean. Since Binance is an exchange that Koreans use much more than Bybit, Binance’s Korean customer proportion will also be very high.

Of course, Binance, the richest exchange in the world, won’t sit still. This company is already working in major advanced countries such as the United States to authorize financial authorities, or in the United Kingdom to acquire licensed companies. Therefore, it is something to keep an eye on. But whatever the outcome, the number of exchanges that exist only in offshore is rapidly decreasing as of 2021.

Now, Binance must create separate corporations in each country and comply with the special law in Korea, and the new payment method which includes cryptocurrency regulation in Japan and Singapore. But this would be very embarrassing to run the current Binance.com. This is because under Korean policy, margin transactions cannot be provided, the number of listed coins will be limited, and ISMS certification is required to reveal all the server configurations in detail. Sharing of order books between Binance.com and Binance Korea has also been prohibited. Therefore, it withdrew the Korean corporation since the substantive operation seemed impossible.

Then what will be the direction for so many Binance Korean customers? Should we take over one of our big4? Still, it’s impossible to link with Binance.com. It would be very brainy to decide on an infinite loop like this.

By the way, is there only one regulation in Korea? Binance has been operating with customers all over the world except for the United States. Regulations vary from country to country, and if you set an A for one country, it can be a problem in another country. That’s why Coinbase, the largest exchange in North America, has not yet been subscribed to by Koreans.

Of course, it will help sales, but as soon as receiving, it must follow Korean regulations. That’s why the C2C exchanges, which have nestled in offshore and have been very pleased so far, have now of course faced – but was not sure when – regulations.

It’s getting harder to reverse the ranking inside the ring.

Then why do Koreans use Binance? There may be many reasons, but the biggest one is that there are many kinds of coins. Upbit became the overwhelming No. 1 player in Korea as a latecomer because there were much more listed coins in partnership with overseas exchanges from the beginning. What a great strategy.

By the way, the direction of regulation in Korea is facing to the reduction of coins. Japan’s precedent shows that Japan must pass strict screening by the Japan Virtual Currency Exchange Association(JVCEA) where exchanges are gathered to renew its listing. Once passed from the screening, it can list on 26 exchanges in Japan that have been licensed so far.

So, what’s going to happen? Small exchanges are bound to remain small. Before going to a large exchange, putting it on a small exchange for a while and if it becomes popular and verified, then going to a large exchange would make the small exchange to make a living. But if we list all the same coin at the same time, are there any reason to use a small exchange?

Thus, there is no specific reason for large exchanges to reject regulations on reducing listed coins or controlling listing through association. Rather, these regulations will make it difficult for exchanges ranked below the third in each country, and if coin differentiation is not achieved, the market share gap will inevitably be widened.

This is because as long as it is on the regulation of same financial authorities, the 8th place can’t do margin transaction that 1^st place can’t do it, or the 5th place can’t do coin operation which the 2nd place can’t do it. If it does, everyone does it, and if it can’t, everyone can’t do it. Therefore, it is not easy to change the ranking.

So, Japan’s sub-exchanges have already been buried and are often contacted. With the approval of Japan’s Financial Services Agency(FSA) and participating in all the self-regulatory organizations, 100% of the exchange shares can be bought at the current level of 25 billion to 30 billion won. In Korea, banks are still trading only big4, but these exchanges are licensed, so of course, customers can receive yen officially through major banks in Japan.

Nevertheless, the characteristic of the exchange industry is that if unusual coins are not listed, customers will eventually be attracted to the first class. It’s because the market with the most customers is easy and fast to buy or sell.

Therefore, if Korea follows Japan’s footsteps, it will be very difficult to reverse the ranking of latecomers. At least, Coinbit’s comet-like growth story seems difficult to reappear in Korea. Because the FSS is known to receive regular daily or weekly reports on the exchange’s operations in the future on which coins are listed and how much each coin is traded, if unlisted coins surge excessively or have a large transaction amount, it will naturally draw attention.

Currently, only exchanges with real-name bank accounts are allowed to advertise on Naver and Kakao. This story has already been a few years which is, if having no bank account, advertising would be impossible, and it won’t grow. Then if no growth, you won’t get a bank account, and then having no bank account means no advertising … This continuous loop is also the reason why ranking changes would be increasingly difficult.

Of course, there is one method that the latecomer can survive – or at least argue that it could survive. It is targeting other customers. Sadly, however, the top student is always good at math, physics and is also outstanding at music, art, and sports. For example, unlike the first and second place exchanges which target individuals, eighth and tenth places could claim that we target institutions. However, institutions would want to deal with the first and second places rather than dealing at a bad price with the eighth and tenth places.

If I’m the biggest buyer – so-called organization -, then I’ll go to Costco and get it cheaply, not from the local market. Of course, let’s say that for some reason, Costco still only deal with the individuals. So inevitably, I, the biggest buyer, go to the local market and take out the goods. But would this situation be sustainable?

Of course, the first and second places will also look around and talk to the regulatory about why we can’t do corporate business which 8th and 10th places are doing it. I’m sure there would be a lot of logic. Trading at a better price in a big market with institutions, making institutions to trade on a safer infrastructure, and so on, so the first and second places will eventually start agency operation. Costco have opened, so are there any big buyers who would stay in the local market and trade? Unfortunately, it’s only a matter of time.

It’s a side story, but the characteristic of the Japanese exchange that came for sale was that it was a specialized exchange for institutional customers. In the end, latecomers who have been pushed back in the competition to attract individual customers are forced to target institutional customers, but there are not many institutions that generate meaningful sales in Japan and Korea yet. By the time the agencies make meaningful sales, the Big4 will be releasing all their products. There is nothing that I can do that others can’t, and also impossible for others to do something that I can’t inside the regulation-ring. That’s why it’s getting harder to change the ranking.

Then what options do we have left?

Now, whether it’s heavyweight, featherweight, or lightweight, you have to be the first in your own ring or transition into a UFC player. If it’s a bigger ring like U.S., you can manage to get up to the third place. However, if your ring is relatively small, only the first and second place will make meaningful profits. If you fall behind the third place in this setting, it might be better to change to professional wrestling, kickboxing, or UFC, rather than playing the same game and remain in third place.

We have the same agony. After three years of operation, we decided to change our field and location, judging that the ranking competition is completely over among the Korean businesses. That’s why we turned to overseas markets at the end of last year to focus on the exchange market through Changer, especially between digital currency and foreign exchange.

Unlike trading, exchange is 1) immediate transaction (trading waits for the transaction to occur, but exchange works immediately according to the exchange rate) 2) Fixed rate (Exchange office determines the current price through negotiations between customers, but a currency exchange has the exchange rate announced unilaterally and decides whether the customer will accept the exchange rate) 3) Removal of the transaction fee (exchange office receives a certain percentage of the transaction fee. On the other hand, for currency exchange, the profit margin is already included in the exchange rate, so there is no additional transaction fee).

Of course, global demand is not as large as the exchange yet, but when the era of crypto utilization comes beyond the current era of crypto speculation, it will be more convenient to use the currency exchange than to use the common exchange. For example, suppose you use crypto for remittance or payment. The crypto price has to be fixed to make a safe transaction. If the crypto price changes throughout the payment process, everything’s going to be a mess. The same goes for remittances. Therefore, in the upcoming era of crypto utilization, the demand for currency exchange will increase significantly.

If you can be the #1 exchange in the world and for each country, sticking to the speculative demand of crypto will make your company grow bigger. However, as of July 2021, not only the world’s #1 exchange but also the #1 exchange in each country has already been decided. There are players who are good in the Philippines, Vietnam, and the Middle East, not to mention the United States and Korea, which have a large crypto market.

So instead of being one of the Top 100-200 global exchanges, we decided to become the #1 currency exchange and a long-term beneficiary when the era of crypto utilization arrives. That’s why we’re now trying to bring together scattered liquidity from both CeFi and DeFi to provide the best exchange rate for our customers. This is because the core competitiveness of currency exchange is none other than the best exchange rate.

Of course, crypto-crypto exchange is important, but the market where Changer focuses on is the crypto-foreign exchange. There are about 180 kinds of fiat currencies in the world, and there are about 10,000 kinds of crypto. Therefore, the smooth flow of exchange between them and securing the best exchange rate will be a global challenge in the future. As there are only seven legal currencies around the world which are exchanged with Bitcoin for more than $ 50m a day, the remaining 170 fiat currencies need a helper product like Changer to be exchanged for digital currency.

The Path that we have chosen

Judging from the recent changes in the regulatory compliance discussed earlier, it is now dangerous to license and operate offshore. If so, you must go to the country where you will actually operate and get a license, but if you are going to exchange currency that is not yet in demand, it will be difficult to produce results in small countries and small markets.

Therefore, we decided to pursue the license acquisition in the United States. 1) As seen from the Coinbase IPO and Circle’s merger of SPAC, the U.S. is the most recognized market for Crypto companies’ multiple. 2) There are large financial institutions and corporates that will be the primary target of demand for currency exchange. 3) Competition is relatively less fierce (Korea has more than 30 exchanges, but only 7 in the U.S.).

This is a very tedious journey that takes at least two years, but if currency exchange between digital currency and foreign exchange becomes important in the future, it is necessary to get a license to operate safely in the largest market.

We already established the U.S. corporation in 2018. In early 2019, we completed the development of the AML(Anti Money Laundering) program with the most influential global law firm in the crypto market, where Coinbase and others are its customers. In early 2020, we got registered as MSB(Money Service Business, Currency Service Provider) under FinCEN(Financial Crimes Enforcement Network), the bureau of the U.S. Department of the Treasury. We’ve been preparing for many years in the U.S. market, so even if it takes a long time, we are not starting from absolute 0.

However, as an exchange, there are many early starters, so we have to be #1 in other businesses. That’s as much a challenge for Changer as getting a license. In the United States, there are currently three legal ways of doing cryptocurrency business.

The first is to obtain a Money Transmitter license in 50 states. The second is to obtain a bank charter in Wyoming, which has recently introduced a large number of blockchain-friendly regulations. The third is to obtain a federal bank charter from the US Office of the Comptroller of the Currency (OCC). The latter the order, the longer it takes and the higher the level of difficulty, but the higher the degree of freedom.

Cryptocurrency service providers in the U.S. first start dollar deposit and withdrawal services in partnership with the state bank/truster’s license, and then have their own licensing strategies in the form of obtaining the remitter’s license in 50 states. Kraken, the #2 exchange in the U.S., is responding to regulations by skipping a remitter license and getting a bank charter right away in Wyoming.

The main goal of the Changer team is not to waste time just to get a license and miss the right timing to launch in the market. Fortunately, I have been researching the U.S. market for a long time, so I will try to avoid options that are too difficult or too time-consuming, and try to respond to the license with an approach that is as realistic as possible.

There are only three countries in the world that have implemented laws regulating the cryptocurrency industry on a nationwide basis: Japan, South Korea, and Singapore. The United States is still relatively less rigidly regulated, and COVID-19 has extended that period.

We’re bringing Team Chain Partners back again in the U.S.

If you write a long article like this, you end up with the topic of recruitment. But this time it’s a little bit special. Because I’m looking for Chain Partner U.S. team. We are looking for team members who will be in charge of obtaining licenses in the United States, driving the necessary business alliances, and gathering potential customers.

Rather than moving from another country, I’d like to give priority to people who already live in the United States and have the understanding of the business ecosystem of the United States. Full-time is good, a part-time or having two jobs is acceptable. It would be better if you have an understanding of crypto industry and business development/business partnership/sales work in general.

We will ensure enough Changer tokens to bet on the future, stock options for U.S. corporation, and a level of sufficient salary to live locally. The U.S. team’s office location will be San Francisco, and when it comes to hiring, one must be able to move from other cities in the U.S. to San Francisco or Bay area.

Of course, English should be at the level of a native speaker. Rather than simply looking for staff, we are looking for a leader to set up the U.S. team from scratch and grow it into the center of the Changer business. Therefore, I prefer someone who has entrepreneurship and leadership, and who can direct the recruitment of the American team.

If you are interested, please email pyo@chain.partners. I hope to have a face-to-face meeting with Zoom for enough time to get to know each other. I will sincerely explain what we are planning and what we are looking for.

First of all, we are planning to have sales, product planning, and PM positions in the United States who will be in charge of the business. Therefore, if you are interested in these various positions, please contact us.

It’s okay to say ‘I’m interested, let’s talk‘ instead of sending an email as if you’re applying right now. We need to get to know each other, so feel free to email us at any time so we can contact you and have a chat.

Thank you.

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