Update on South Korea and Cryptocurrency

Stack of Bitcoin coins on South Korean flag
Stack of Bitcoin coins on South Korean flag

Many South Koreans seem to be obsessed with cryptocurrencies. The country’s lawmakers? Not so much. From the prime minister down, officials have warned that the speculative mania surrounding Bitcoin and its peers is dangerous. Demand for the virtual currency was so extreme at one point in January that it lifted prices in Korea 50 percent higher than those in America. The premium has since receded, but policy makers are still worried. Given the nation’s outsized role in the crypto world, the prospect of a clampdown has captured the attention of traders worldwide.

1. Why are South Koreans so keen on cryptocurrencies?

Korea’s individual investors have long had an affinity for supercharged financial wagers, says Tai-ki Lee, senior research fellow at the Korea Institute of Finance. Bitcoin’s stateless status appeals to some citizens who’ve grown wary of keeping their savings in a country that shares a border with Kim Jong Un’s North Korea, according to Kwak Keumjoo, professor of psychology at Seoul National University. Whatever the reason, even the central ban has had to ask staff to refrain from trading cryptocurrencies, particularly during work hours.

2. How big is South Korea as a crypto-trading center?

It punches above its weight. Among traditional currencies, only the U.S. dollar was used more than the Korean won to trade the major cryptocurrencies as of Jan. 11. The won accounted for more than 10 percent of trades in Bitcoin for much of the second half of 2017. It was the No. 1 currency for transactions in Ethereum — the second-largest digital token by by market value — until late in the year. The won’s role has declined recently, however, as regulators began to talk tough.

3. What is the South Korean government doing?

After banning initial coin offerings in September, regulators have been mulling everything from shutting down local cryptocurrency exchanges to allowing them to operate under increased supervision. While a broader policy is being formulated, authorities are taking measures to prevent money laundering and other illegal activities. As of Jan. 30, the country outlawed deposits into anonymous virtual accounts at banks and told lenders to report suspicious traders, including those who deposit or withdraw 10 million won ($9,330) or more a day from cryptocurrency venues. Policy makers have also banned minors, foreigners and financial institutions from domestic exchanges.

4. How have cryptocurrency markets reacted?

With concern. Investors’ big worry is a closure of virtual currency exchanges. That would make it harder for Koreans to buy, curbing a key source of demand. Bitcoin dropped as much as 12 percent on Jan. 11 after the nation’s justice minister reiterated his proposal for an exchange ban. The market recovered some of its losses after a spokesman for President Moon Jae-in said the proposal was one among several and that nothing had been finalized.

5. What are South Korean officials worried about?

Mainly money laundering, tax evasion and excessive speculation. Prime Minister Lee Nak-yon has even gone as far as to say that cryptocurrencies might corrupt the nation’s youth.

6. Won’t investors get around restrictions?

Probably. Even if lawmakers push forward with an exchange ban, local traders are likely to find ways to keep buying cryptocurrencies, said Mike Kayamori, head of Tokyo-based exchange Quoine, which counts Koreans among its customers. “There are always underground exchanges” and over-the-counter platforms, he said. “They’ll probably convert their money into bitcoin there, and then start trading offshore.”

7. What’s next?

It’s unclear whether the justice ministry’s proposal to shut down the exchanges will be approved by other government ministries and parliament. Lawmakers may balk at the proposal given the groundswell of public opposition: A petition opposing the measure on the president’s website has attracted more than 200,000 names. The country’s Office for Government Policy Coordination has said it will decide on whether to pursue a bill to ban cryptocurrency venues only after “sufficient discussions and opinion coordination” across departments.

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