South Korea’s Financial Intelligence Unit (FIU) has launched an investigation into Bithumb, one of the country’s largest cryptocurrency exchanges, over its decision to share an order book with Australian trading platform Stellar.
The FIU, which operates under the Financial Services Commission, is reviewing whether Bithumb’s arrangement complies with the Special Financial Transaction Information Act, a law that governs the brokering of virtual assets and imposes strict AML and customer-verification requirements.
On September 22, Bithumb announced that it had reached an agreement to share the order book with Stellar when it opened its Tether (USDT) market.
Liquidity benefits under scrutiny
Order book sharing is a practice in which buy and sell orders from one exchange are displayed and matched on another platform. It is relatively common in the crypto trading space. Proponents say it boosts liquidity and allows smaller exchanges to compete with larger rivals, among other perks.
However, regulators tend to review this process closely due to the risks it carries because by connecting order flows across jurisdictions, exchanges may unintentionally allow unverified customers or illicit transactions to flow through their systems.
South Korean authorities, as expected, are concerned about their ability to monitor foreign users who gain indirect access to domestic trading platforms.
Bithumb deals with legal hurdles and regulatory pushback
The Special Financial Transaction Information Act prohibits South Korean exchanges from brokering trades with other platforms unless it is fully compliant with its set rules for that category. Some of these rules include confirming the foreign partner’s license from its home regulator, verifying customer information for non-South Korean traders, and ensuring that local authorities can access transaction data upon request, among others.
According to people familiar with the FIU’s probe, Bithumb’s arrangement with Stellar may fall short on several counts. Authorities are said to be questioning whether the South Korean exchange conducted sufficient due diligence on Stellar’s licensing status and whether it can credibly vouch for the identity of Stellar’s customers.
One issue that may be a stumbling block in Bithumb’s move to stay 100% compliant is the requirement to provide South Korean regulators with access to foreign customer data. Experts note that sharing such information across borders with the regulator of another country raises privacy and>Bithumb wanted to comply, it is unclear whether Stellar has the infrastructure or legal authority to share detailed customer information with South Korean authorities. However, a Bithumb official said that they discussed this with the Australian exchange.
South Korea’s crypto sector is watching scrutiny on Bithumb
Bithumb has defended its decision, saying the partnership with Stellar was made in consultation with financial authorities and that the company remains committed to following local regulations. But it seems the bone of contention for the authorities is Bithumb’s implementation of these procedures.
However, given the available information, it’s not clear to what extent Bithumb has been compliant or non-compliant.
If regulators rule against Bithumb, it may discourage other South Korean exchanges from pursuing similar liquidity-sharing arrangements.
The investigation comes as South Korea cements its role as one of the world’s most tightly regulated crypto markets. Since the collapse of TerraUSD in 2022, regulators have closely watched exchanges and the crypto industry in general, demanding stronger AML protocols and putting in place tighter controls over customer verification.
