South Korea’s confusing approach to cryptocurrencies has left many wondering as to the exact stance that the authorities are taking. Why is the government struggling where others have not?
What has happened so far
Just over half a year ago, it looked like as though South Korea would follow in China’s footsteps by banning Initial Coin Offerings (ICOs) and trading cryptocurrencies on exchanges. Other ideas such as taxation and increased regulation were also under consideration then, with government officials citing any number of reasons from money laundering and tax evasion to the “corruption of youth”. The government was unstinting in its criticism of “deceptive” cryptocurrencies, describing them as a “violation of the capital market law”.
A slew of high-profile arrests for fraud and the sale of fake cryptocurrencies appeared to justify the government’s crackdown. Then, the government stated that a trading ban would be highly unlikely as it intended to follow the precedents set by the likes of Japan and the United States. In an attempt at a more reasonable solution to money laundering and other illegal concerns, the government would force traders to use their real names when trading.
Ultimately, the government only went ahead with the ban on ICOs. Government ministries apparently could not agree with each other on the decision to ban trading, and “raids” on cryptocurrency exchanges turned out to be routine visits from tax regulators that had been embellished by the media. Adding to the confusion, the government’s stance has not been supported by developments elsewhere in the country.
South Korea’s infamous tuition centres went so far as to offer cryptocurrency courses, and new media outlets dedicated to cryptocurrencies sprang up overnight. The national capital city of Seoul even announced plans to launch its own cryptocurrency in order to fund welfare programmes.
What is happening now
Fast forward to today and South Korea’s government is now considering overturning the ban. The reasons for the volte-face are still open to speculation. The South Korean public has long been unequivocal about their support for cryptocurrencies, with a petition to the president earlier this year collecting over 200,000 signatures. 30% of those who participated in a survey revealed that they not only dabbled in trading cryptocurrencies but also had an average of USD5,357.14 invested in them.
Many South Koreans view cryptocurrencies as a get-rich-quick scheme that has no basis in reality. Compounded by the fact that youth unemployment is presently at an all-time high in the last two decades, gainful employment is not nearly as attractive as it once was.
Such sentiments may explain how and why South Korea has continued – in spite of government efforts to the contrary to date – to remain the second largest cryptocurrency trading market in the world.
Why this is happening
The failure of the South Korean government to present a unified and concerted approach probably stems from the conflict between the desire to fight illegal activities and the fact that the public has too much at stake to give up.
Unlike China, where the government has the freedom to act unilaterally in clamping down on cryptocurrencies the South Korean government risks severe backlash should it attempt to do so. In a country where the public is not afraid to speak its mind and has done so on many occasions, suddenly and totally wiping out a sizeable quantity of their monies would be a poor decision indeed.
Nor does South Korea appear to be fighting money laundering and capital flight on the same scale as China does. One reason for that may be that South Korea does not mine cryptocurrencies as China does: one theory has it that Chinese miners were able to set cryptocurrency prices as they essentially controlled the supply with the sheer volume that they were able to produce.
With that, Chinese criminals were plausibly able to engage in money laundering, capital flight, tax evasion and all another manner of illegal financial activities – on top of a handsome return for their troubles.
That is not to say that such illegal activities do not take place in South Korea, or anywhere else in the world. However, it is difficult as traders are subject to market forces and movements. Without miners to engage in supply-side control and the inability to accurately predict or fix cryptocurrency prices, the South Korean government should not have much to worry about.
Further, the ICO ban may have been a response to the fraudulent practices then taking place. As in China, ICOs may have been used to defraud naïve investors hoping to get rich quick. Even so, the South Korean government has realised that the benefits of legalising ICOs far outweigh such a downside, which in any event should be minimised if subjected to greater regulatory scrutiny.
What will happen in the future
It appears that the South Korean government is seeking a return to the status quo before the crackdown and the confusion. The precedent set by its neighbour, Japan, is on the opposite end of the spectrum compared to that of its other neighbour, China. With cryptocurrencies regulated with a light touch and minimal government interference overall, Japan may set the tone and pace for South Korea to follow. The crackdown and confusion may have been a premature reaction in response to China’s example.
Given South Korea’s history with foreign investors and investment, its government did well to err on the side of caution. What it did not do right, however, was to fail to apprise the public of what it wanted to do – as well as what it was doing.