The state of crypto trading in South Korea
Despite consistently having the world’s third largest volume of crypto trading, the South Korean laws have been among the toughest. Skepticism from the government and regulatory agencies have followed several high-profile hacking and theft incidents, leading them to ban ICOs altogether.
Trading cryptocurrency has been extremely popular in the country, with 1 in 3 salaried workers having some holdings. At the end of the last year, regulatory agencies vowed to outlaw ICOs and even ban cryptocurrency trading. This prompted a petition of over 200,000 signatures of citizens who wanted to stop the regulation.
The variations in policy have had an effect on the market, given the large part of the overall market South Korea represents. A move in last December to make it illegal for anonymous accounts to buy cryptocurrency resulted in massive losses, including wiping $20 billion off Ripple’s market capitalization.
However, in recent months, the government has been reversing some of these restrictions, for instance lifting the ICO ban in May. In July, they wrote the new legislation to recognize cryptocurrency as legal assets. Finally, in late October, they cleared banks to work with crypto exchanges under new regulations, marking the latest move to legitimize bitcoin traders.
Let’s take a look at each twist and turn in more detail.
In September 2017, the South Korean government announced that they would be banning ICOs, due to the fact that they considered it a violation of the Capital Market Law. Several high-dollar fraud cases, with no recourse for those who bought tokens in the ICO, led them to look at these sales as more of a gamble.
“If there is an unfair act, a third party has to intervene, but it is difficult to intervene until the transaction volume or price soar,” said an official from South Korea’s Financial Supervisory Commission.
This announcement caused a big drop in prices across markets, but the news was somewhat forgotten as the government announced it was considering a ban on all cryptocurrency trading.
Threats to ban exchanges
In January, conflicting reports set the market into a bit of a panic, and cause massive protests when it was reported by Reuters that the government was planning to completely ban cryptocurrency trading. The government immediately came out saying that ‘nothing was finalized yet,’ causing further confusion over the matter.
Along with the specter of the ban, authorities raided several exchanges over alleged tax evasion. The ensuing panic caused bitcoin traders to dump assets, leading to as much as a 21% drop in the BTC price.
In late January, new regulations banned foreign and domestic crypto investors from trading anonymously. The move required withdrawals from exchanges to only be permitted when the trader’s identity is confirmed to be the same as the bank account holder.
Tax rate increases
Under the South Korean law, any corporation with income over 20 billion won ($17.9 billion,) must pay 22% corporate and 2.2% local income taxes. Prior to the announcement, exchanges had been skirting the rule, partially because the government refused to recognize their legitimacy.
This was seen as part of their effort to clamp down on crypto trading, despite high demand. In fact, demand was so high that South Korean investors already pay a premium of up to 30% compared to other markets. This led foreign investors to hedge on the premium, allowing them to take advantage of the spikes in demand.
Banning government officials from trading crypto
In March, it was announced that government officials and minors would be banned from trading cryptocurrencies, “even if there is no job relevance, public officials could be subject to discipline.” In January, some South Korean officials from the Financial Supervisory Committee were accused of insider trading, likely prompting the action.
In June, a pair of costly hacks reinforced some of the government’s concerns, with $40 million stolen from Conrail and $30 million from Bithumb. This caused another tumble on markets, and somewhat vindicated the government position that these exchanges were not properly secured.
The government released a comprehensive report of all the known hacks from 2015 to 2018, which totaled 158. Of those, 91 happened in 2018 and only six arrests had been made in connection.
Government puts together comprehensive regulation
While all of this turmoil and uncertainty surrounded the cryptocurrency market in South Korea, the government was diligently working on regulatory solutions to allow the practice to continue, but with safeguards. In October, ruling party Chairman Min Byung-Doo made positive but cautious remarks about the new markets, showing the determination by the government to encourage investment.
New regulations for banks and a landmark court decision paved the way for exchanges to work with banks for the first time, a milestone for the industry in South Korea. Critically, banks could offer ‘virtual’ accounts to crypto exchanges, providing an instant system to deposit or withdraw funds.
The Chairman of South Korea’s Financial Services Commission made the statement on October 26, with the changes to go into effect on December 30.
Concerns over Anti Money Laundering (AML) and Anti Terrorism safeguards have been a big stumbling block for South Korean regulators, but assurances made by the Korean Blockchain Association appear to allow banks and exchanges to monitor for those issues.
The government is also exploring the rescinding of the ban on ICOs, following Chairman Min’s statements. Following many other countries, including the US, it appears South Korea is on the way to embracing and regulating the cryptocurrency and ICO markets, further showing that these technologies are here to stay.