On September 17, Upbit added JPYC, a stablecoin backed by the Japanese yen, to its platform. The coin opened at roughly 12 Korean won per token but surged to 37.6 won within an hour, a movement that represented more than a four-fold deviation from its intended value. Analysts traced the volatility to the thin order book on the exchange, which offered insufficient depth for large trades.
Regulatory response and potential market-making carve-out
Following the incident, the Financial Services Commission (FSC) announced that it would examine whether a structured market-making system could be introduced for digital assets. Yoo Young-joon, who oversees digital finance policy at the FSC, said the agency is assessing tools that could boost efficiency and curb extreme price swings. Current provisions in the Virtual Asset User Protection Act treat market-making activities as potential manipulation, effectively barring firms from supplying liquidity in the crypto sphere.
Academic perspective on liquidity challenges
South Korean scholars have highlighted the liquidity shortfall for years. A 2024 study in the Seoul Law Review noted that regulators have been hesitant to carve out an exemption for market makers because of manipulation concerns. Another paper from the Korbit Research Center argued that the absence of a formal liquidity-provider framework has led to persistent pricing distortions, citing the well-known “Kimchi premium” as evidence of market inefficiency.
Broader regulatory context
The FSC is also working on a comprehensive Digital Asset Basic Act that would cover stablecoins, exchanges, disclosure standards and internal controls. While the draft legislation is moving forward, several elements remain unsettled, such as the rules for issuers of won-denominated stablecoins. The recent JPYC episode may accelerate discussions around a dedicated market-making regime within this broader legal architecture.
Why it matters
Introducing a regulated market-making mechanism could smooth price volatility for stablecoins and other digital assets, protecting retail investors from sudden losses. It would also align South Korea with jurisdictions that already permit licensed liquidity providers, potentially enhancing the country's attractiveness as a crypto hub. Finally, the move signals a shift in regulatory philosophy, from a blanket prohibition on market-making to a more nuanced approach that balances investor protection with market efficiency.
