South Korea — a case study in how regulatory bodies can handle cryptocurrencies

In what could be a significantly positive development for the crypto market, South Korea may relax some of the restrictions imposed on cryptocurrencies, as the new governor of South Korea’s Financial Supervisory Service (FSS), Mr. Yoon Suk-heun has indicated recently. In this post we explore the unique position of South Korean in the crypto space, its seemingly regulatory pitfalls and how the government has dealt with them.

Unique position of South Korea in the crypto space:

South Korea is important for the global crypto market, and this is borne by the fact that as of early 2018, 20% of the Bitcoin transactions in the world took place in this country. 3 out of every 10 salaried employees in South Korea trade in cryptocurrencies, with Bitcoin, Ether, and Ripple being the most popular with the South Korean citizens.

In addition to the power that most people can experience with the decentralized cryptocurrencies, there are added reasons for the South Korean people being highly interested in these digital currencies:

• Despite South Korea being an economic powerhouse, the country doesn’t have sufficient high-yield investment options, and this drives people to invest in crypto assets;
• In recent years, high rate of unemployment among South Korean youth has also driven them to trade in digital currencies.

Concerns of regulators and the government in South Korea about cryptocurrencies

The enthusiasm of the South Koreans for cryptocurrencies is in sharp contrast with how regulators and government in the country have viewed the crypto assets. Government and regulators have voiced the following concerns:

1. The Crypto market is prone to highly speculative trade;

2. The popularity of cryptocurrencies may adversely impact the position of fiat currencies;

3. The relative anonymity provided by cryptocurrencies allow money laundering and funding of criminal activities;

4. Being under the radar, crypto exchanges and traders evade tax liabilities;

5. High volume of trade in crypto assets might be resulting in the flight of capital out of the country;

6. Foreigners and minors have traded in digital currencies in South Korea;

7. Anonymous or pseudonymous crypto trading accounts make it impossible for regulators to prevent funding of crimes with these virtual currencies;

8. Round-tripping of Chinese money via South Korean crypto exchanges.

9. Initial Coin Offerings (ICOs) raise significant amount of money, but are conducted in a completely unregulated environment, offering no protection to the investors from fraud.

10. High possibility of South Korean youth veering into crimes and drugs, with their heavy investment into cryptocurrencies.

The Govenment’s Response

Driven by these concerns, the regulators and the government in South Korea have taken the following steps:

1. South Korean FSS has banned all ICOs in September 2017;

2. South Korea’s Financial Services Commission (FSC), which is the financial regulator, and the superior body of FSS, had mandated in January 2018 that all crypto trading accounts will need to be associated with real names, and both banks and crypto exchanges must enforce this. Six domestic banks were tasked to issue new trading accounts that follow know-your-customer (KYC) norms.

3. Regulatory bodies received full authority to examine the transaction records of the crypto traders, which also prevented foreigners and minors from trading in cryptocurrencies.

The most drastic move planned was to ban cryptocurrencies completely in South Korea, by shutting down all crypto exchanges in the country, and it was announced by the justice minister Park Sang-Ki on January 11th, 2018.

However, there was strong public opinion against this move, and over 200,000 citizens petitioned the president of the country asking the government to reconsider this stance. The government relented, clarifying that banning cryptocurrencies was only one of the various options that were being considered, and no decision was taken on that.

Apprehensions voiced by senior government functionaries and the above-mentioned actions undertaken by the regulators have already slowed down crypto trading in the country significantly.

Forward-looking regulatory interventions expected?

Mr. Yoon Suk-heun, the new governor of FSS, is known to be a reformist. His statement highlighting that there are some positive aspects of cryptocurrencies have already raised hopes of forward-looking regulatory intervention. He has stressed on well-defined regulations, and believes that this will result into a stable crypto market. He has stated that FSS will work with the parent regulatory body FSC, to bring in such regulations. He has started functioning on May 8th, and more information on his plans is awaited.

At the same time, a group of South Korean legislators are working on a bill that will legalize ICOs in the country, provided they fulfil certain regulatory conditions. The objective of the bill is to ensure that developments around the promising blockchain technology continues apace, while investors are protected from fraudulent schemes.

While more information is awaited on what changes will materialize in South Korean regulatory landscape vis-à-vis cryptocurrencies, it’s certain that positive and forward-looking regulatory interventions will reduce the uncertainty, and is likely to boost the crypto market in a country that’s very important for the global crypto market.

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