Korean regulators warn on offshore perpetual futures, vow to report illegal solicitation

South Korea's Financial Services Commission (FSC) and Financial Supervisory Service (FSS) on Oct. 16 urged investors to be cautious about perpetual futures traded on offshore platforms such as overseas crypto exchanges. In a press note issued at 2 p.m. KST, the two agencies said the products are linked to moves in the underlying asset at 10 to as much as 200 times and are not covered by investor protection under Korean law. They added that offshore platforms found operating illegally in Korea would be reported to investigative authorities.

At 150x, a 0.66% move against you could mean full liquidation

Perpetual futures share a name with the futures traded on Korea's securities market but are built differently. The regulators said the products (1) have no expiry, (2) do not assume delivery of cash or assets at a set future date and (3) trade 24 hours a day, every day of the year. They added that many countries have yet to establish supervisory frameworks for the products and restrict such services.

The biggest risk is leverage, the multiple by which borrowed funds amplify a position. The regulators gave the example of a product linked to a Korean stock index at 150 times. A move of about 0.66% against the position during trading hours could trigger forced liquidation of the entire investment. The higher the multiple, the more likely a position is liquidated before additional margin can be posted, wiping out the whole stake in an instant, they said. Because of this speculative nature, such products are not permitted under Korea's regulatory system, the agencies said.

Binance's SK hynix perpetual logs $2 billion in 24-hour turnover

Offshore products tied to Korean stocks have multiplied this year. Binance listed perpetual futures on SK hynix, Samsung Electronics and Hyundai Motor in sequence around noon KST on June 2. A product tracking the U.S.-listed iShares MSCI South Korea ETF (EWY) came earlier, on March 16. Bybit listed the same three stocks on June 4, with maximum leverage of 100 times on its Samsung Electronics and SK hynix contracts.

Volumes are substantial. As of about 3:30 p.m. KST on Oct. 16, Binance's SK hynix perpetual had 24-hour turnover of about $2.04 billion and open interest, the total value of outstanding contracts, of about $490 million. At the same time, the Samsung Electronics contract showed turnover of about $250 million and open interest of about $32 million. Bybit's SK hynix contract had 24-hour turnover of about $150 million.

Little recourse under Korean law if a platform fails or halts trading

The regulators said that while derivatives in Korea are subject to market-entry requirements for operators and an investor protection framework under the Financial Investment Services and Capital Markets Act, most offshore crypto platforms fall outside Korean regulation, making comparable protection hard to expect.

If a platform goes bankrupt, suspends operations, halts trading unilaterally, or suffers technical or financial incidents and disputes, Korean legal remedies and relief procedures are difficult to apply. Korean supervisors also have difficulty confirming whether customer deposits are properly safeguarded.

Referral codes aimed at Koreans can lead to criminal complaints

Examples of illegal business cited by the regulators include soliciting Korean residents to open accounts through referral codes or collecting fees from them, as well as cases where offshore products affect the Korean stock market. The authorities will monitor launches of products linked to the Korean stock market and their impact on the domestic market, and will ask major offshore platforms supporting Korea-related perpetual futures to avoid violating Korean law.

Whether to allow similar products in Korea will be reviewed cautiously, taking into account market impact, investor protection and global regulatory discussions. The press note was issued jointly by the FSC's virtual asset and capital markets divisions, the Korea Financial Intelligence Unit's virtual asset inspection division, and the FSS's virtual asset supervision and capital market supervision departments. A day earlier, on Oct. 15, the FSC held an emergency meeting with related agencies on stock market conditions in connection with the decline in Korean equities.