Some of Bitcoin’s price correction has come down to the South Korean government. South Korea has attempted to stop anonymous cryptocurrency trading, and has barred foreigners from entering the market. And while the exact details of the plan have not yet surfaced, just the idea that the government could interfere has been enough for the market of Bitcoin and other cryptocurrencies to drop sharply around the world.
The world’s largest cryptocurrency by market cap (Bitcoin) lost around a quarter of its value in a space of just a few days. While the less popular currencies dropped by even larger amounts in some cases. But of course, the prices for cryptocurrencies are volatile, and these price corrections could be pegged to different things. But it does seem obvious that South Korea plays a key role in the ups and downs of cryptocurrencies across the board.
South Korea Is The Third-Largest Market
In terms of market size, South Korea is the third-largest market for cryptocurrencies on Earth, only rivaled to Japan and the United States. The tiny country is the hub of activity for more than a dozen exchanges for cryptocurrencies, and their demand is so lucrative that these coins are sometimes traded at a premium of more than 40% above other countries. All of these facts had led to an increase in digital currency investment in South Korea over the last several years.
In response to this huge amount of activity, the government of South Korea has labelled the trend “irrational.”, and that consumers should avoid investments such as Bitcoin. The government backed up their assertions through an intervention in the market, which threatened to ban all of the cryptocurrencies and shut down some of the exchanges.
Economic And IT – Related Links
South Korea’s ties to the cryptocurrencies are made stronger through its deep IT infrastructure spread across the country. The amount of tech in SK results in an increased the number of cryptocurrency app users in just 3 months. Also, a slowing economy and rising rates of unemployment have also boosted the interest in these coins in new ways. For many people, one of those ways is trading cryptocurrencies.
As many South Korean investors find themselves lured into the cryptocurrency space, it’s then unsurprising that the greater world has taken notice when governments threaten the market with disruptive measures. Losing South Korean investment could have a major effect on the price of Bitcoin as well as every other virtual currency.
Importance Of The South Korean Market
South Korea is one of the most important markets for cryptocurrencies, as stated by Dr Garrick Hileman at the University of Cambridge.
“A few million people in South Korea, especially the younger generation, are trading in cryptocurrencies. This is a large percentage of the population of South Korea.”
One point to note about these high numbers of trades is that the price of both Bitcoin and ripple are far higher in South Korea than other countries. The prices for these coins can sometimes be 30%-40% higher in SK than the US.
This price variation is due to the company’s control on capital, as well as the fact that there is a limited amount of money flowing into and out of South Korea.
“You can think of Bitcoin as a kind of price spear for South Korea. South Koreans are more than willing to pay more for cryptocurrencies than other countries are. And that has had a positive influence on prices,” said Hileman.
Why The Ban On Cryptocurrencies For South Korea
Although South Korean citizens applauded the introduction of cryptocurrencies to the market, they are shown to have a detrimental effect for the South Korean economy. In November of 2017, Lee Nak-Yeon, the prime minister of South Korea, stated his concerns over cryptocurrency in a meeting with other government officials.
Lee Nak-Yeon stated that there are cases where young South Koreans, including students, are jumping into the market to make some easy money. Also, Bitcoin and other cryptos are being used for illegal activities such as drug dealing and fraud.
The above problems can lead to serious social problems if they are not addressed. The prohibition of trading cryptocurrencies is just one way for officials to curb the problems they cause.
“Cryptocurrencies have created an economic depression,” said Hileman. “Citizens of South Korea are losing their motivation to work. As these people see their peer group earn 10x what they’re earnings in their day jobs, simply through buying crypto currencies.”
“That makes for a dangerous social phenomenon that officials are in the process of fixing.”
What Would Be The Outcome If South Korea Bans Crypto Trading?
To see what would happen with a ban on crypto trading in South Korea, we can examine the Chinese market. Data shows that cryptocurrency trading has actually increased in China since their ban in December of 2017.
For example, Binance, which is a Chinese cryptocurrency exchange, moved its operations to Tokyo. Binance is now considered to be the number 1 exchange in the world, and that at one point it added over 240,000 users in an hour.
Also, the trade of cryptocurrencies in China has moved its operations to other platforms. Some traders have turned towards the platforms Wechat and Telegram to conduct their business. So, the coins have moved to a secondary market rather than through exchanges for cryptocurrencies.
“Exchanges might be banned in South Korea, but there are other ways for people to keep trading. And their prices might go even higher still due to their limited supply in the country,” he stated.
2018 Is The Year Of Bans And Regulations
While 2017 could be considered the dawn of Bitcoin, with the virtual currency entering mainstream consciousness, 2018 could be the year of more regulatory action than ever. In almost every part of the world, government officials and market regulators are taking a look at ways to keep the crypto craze under control.
“At the G20 meeting in April of this year, I think France and Germany requested that cryptocurrency to be put on the table for talks. So, these coins are getting much more attention from governments than in previous years,” says Hileman.
“It’s conceivable that more countries will take China and South Korea’s leadership in the space of cryptocurrencies. This could involve making regulations, or even make these digital assets illegal. And this could happen in 2018.”
So, while many South Koreans appear to love cryptocurrencies, their politicians and regulators are afraid of their impact. Everyone from the prime minister downwards have expressed their concern over the speculative mania that Bitcoin and others have spawned, calling them dangerous. The demand for cryptocurrencies was so great at one point in January that it increased prices in Korea by 50% than those around the world. Although this price premium has receded, policy makers are still concerned. South Korea has an impact on cryptocurrencies that could be disproportionate to the nation’s size, and the threat of a lock-down by the government has captured the attention of traders across the world.
A document published on the 23rd on January stated that South Korean regulators would only allow people to trade cryptocurrencies from verified bank accounts at the beginning of Jan. 30. This rule bought banks up to speed to KYC/AML (know your customer, anti-money laundering) protocols to curb the prevalence of fraud.
In the document, numerous countermeasures were proposed to help reduce the chance of cryptocurrencies from being exploited for illicit activities. These include things such as crime, money laundering, and even tax evasion.
In spite of the upcoming changes to the cryptocurrency market, it was business as usual for traders and the price of Bitcoin.
An unnamed executive at the South Korea crypto exchange Bithumb who was organizing the real-name crypto identity service said that they had “transitioned smoothly” from the change. And that “Everyone is the same in terms of transactions,” he added.
Following this news, other platforms in the space of crypto stated that the moved made by South Korea were a good sign for Bitcoin’s health and longevity.
“What we are seeing now is a required change on the anonymity and illegal uses of cryptocurrencies,” stated Julian Hosp, who is the owner of the crypto startup TenX.
“If the investors of crypto companies and their owners have increased security in the market, then it’s inevitably going to have some downsides over the short-term. However, in long run it’s actually going to benefit the industry significantly,” Hosp explained.
The use of the proposed rules came after a number of confusing messages were sent from South Korean regulators. This ambiguity of the market scared off investors earlier in December last year.
“Processes that protect investors are what the cryptocurrency markets have been lacking, and is what the new rules in regulations in South Korea seeks to change,” said John Sarson, who is a managing partner at Blockchain Momentum, an investment house that specializes in blockchain companies.
“It’s a positive step when investment exchanges know who their customers are and ensures those customers are doing the right thing from a legal point of view,” he said, and added that those rules would help legitimize the cryptocurrency market.
The trade for Bitcoin in Korean won stood at a total of approximately 4 percent in December, 2017, according to the site Crypto Compare. This figure is comparable to more than 40% of the total Bitcoin trade denominated in JPY and 30% in USD.
Despite those sinking proportions for the Korean won, the new rules set out by South Korean regulators are set to make a broader impact for investors, stated by Hosp.
“The space of cryptocurrency investment remains highly emotional. Things are taken from something small and then extrapolated into something huge. Even though Korea is comparatively small to other countries, these changes will still make a huge impact,” Hosp stated, emphasizing that the upcoming changes will be seen as a positive move.
The ongoing regulations to curb the risks in the investment space have been put into question after the $530 million hack on the Japanese Coin check exchange. Following this move, Japanese regulators in verified the legitimacy of several crypto exchanges, and directed those exchanges to improve their security and KYC protocols.
Why Are South Koreans So Hot On Cryptocurrencies?
In the past, Korea’s elite group of investors have been enamored with high risk financial wagers, said Tai-Ki Lee, who is a researcher at the Korea institute of Finance. Bitcoin’s ownerless nature appeals to some people who are disillusioned with keeping their savings in a nation that shares territory with North Korea, stated by Kwak Keumjoo, a lecturer at Seoul University. Due to these reasons, the central bank of Korea has prevented its staff from trading these virtual coins, especially during normal working hours.
How Big Is The Trading Center In South Korea?
The trading center in South Korea definitely pulls its fair share. Among the major currencies, the USD was the only currency to surpass the Korean won in trades as of December 2017. The Korean won was responsible for over 10% of the trades in Bitcoin over 2017. It was also the number 1 currency for trades in Ethereum, which is the second largest token by capitalization.
However, the value of the won has declined significantly, amid tough talk by South Korean regulators.
What Is The Government Of South Korea Doing?
After a ban on initial coin offerings (ICOs) in September of 2017, regulators banned several local cryptocurrency exchanges and allowed others to operate under stricter standards. While a blanket policy is in the works, regulators are taking measures to prevent things like money laundering or other illegal activities. As of January this year, the country has made anonymous deposits and virtual bank accounts illegal. It forced lenders to report suspicious traders, including those that withdraw over 10 million won per day. Regulators also banned people who are under 18, foreigners, and institutions from domestic exchanges.
Markets’ Reaction To Moves In South Korea
The key worry for investors is the closure of major currency exchanges in South Korea. This would make it much harder for Koreans to buy these virtual assets, which would curb a key source of value for the coins.
In response to the changes in the market, Bitcoin dropped in value by as much as 12% in Jan of 2018. This came after news that the justice minister of South Korea restated his proposal for a ban on exchanges. The market managed to recover some of its value after the nation’s president, Moon Jae-In said that the proposal was yet to be finalized, and that it among many things that would require specialist attention.
Won’t Investors Avoid The Restrictions?
It’s likely that even with the proposed restrictions on cryptocurrencies; local traders will still find a way to keep buying cryptocurrencies, as reported by Mike Kayamori, who is the head of Tokyo-based exchange Quoine. “There are always exchanges that are underground or in the black market” and for the ones that aren’t, the commented: “The legitimate platforms will probably convert their funds to Bitcoin there, and could start selling them offshore.”
The majority of investors outside of South Korea are not aware that the cryptocurrency exchanges will be asked to supply details of any transaction that goes above a certain limit. This information will then be forwarded to the relevant South Korean authority.
Holding on to these cryptocurrencies for savings does not mean that investors will be liable for taxes. However, selling these crypto coins after recording one’s earnings from the investment can lead to a capital gains tax. Authorities in South Korea have asked exchanges in their nation to implement a system that records transactions. This system holds information on transaction amounts for tax investigations.
It could be said that the approach for of the South Korea government is a positive sign for crypto traders within its borders. The government has changed its stance from banning the coins altogether to a more relaxed bill of regulations. However, this will make it more difficult for investors to move a large sum of cryptocurrencies in and out of exchanges.
What’s Next For South Korea?
It’s not yet clear if the proposal by the justice ministry will lead to exchanges in the country to be shut down. This proposal will need to be approved first by other ministries, as well as parliament.
A petition was launched that opposes the measure on the prime ministers website, and has gathered more than 200,000 signatures. South Korea’s Office for Government Policy Coordination stated that it would decide whether or not to chase a bill to ban cryptocurrency exchanges only after “adequate discussions and the coordination of opinions” across its departments.