South Korea has recently announced that they will only allow cryptocurrency trading on selected exchanges. Furthermore, a review is going to happen, which will discuss possible capital gains tax for crypto trading. These moves are made to restrain the nation’s frenzied speculation on the cryptocurrency assets. Regulation is well known to be an important factor for the success of cryptocurrency in a certain country. A good example of this is China, who has recently banned the trading of cryptocurrency within the country.
While South Korea isn’t banning domestic cryptocurrency trading, the financial regulators within the country are set to determine the pace of the cryptocurrency regulations. Speculative overheating is sweeping the nation, and illegal activities are increasing in number. Among the people who are banned from trading cryptocurrencies in the country are foreigners and minors. Also, anonymous trading is also no longer permissible on domestic exchanges. These changes will take place beginning January 30.
This is the very first regulatory measure that the South Korean government has taken since the market has been overheating beginning September. These regulations also aim to tackle criminal problems caused by cryptocurrencies which include money laundering and any other related crimes. In addition to market manipulation, the South Korean government worries that the cryptocurrency space is used to fund illegal activities.
It is also possible that market funds are channeled into cryptocurrency activities. In regard to the people allowed to trade on the cryptocurrency exchange, any foreigners, residents, nonresidents or “kyopo” ethnic Koreans with foreign citizenship will not be permitted to trade in the Korean exchanges. You may not believe it, but middle or high school students are active participants in the cryptocurrency market in South Korea. Hence, the Prime Minister has made it illegal for them to join the market as this can lead to the increase in crime when their cryptocurrency investment fails.
During earlier discussions, the government first suggested banning minors and nonresident foreigners. However, the final decision will take into account all foreigners regardless of residents status. The reason being is that these foreigners can invest in their own country instead of the Korean economy. Initially, foreigners were allowed to trade on the South Korean exchange, but it was found that Chinese investors were bringing in a large amount of money to profit off arbitrage and money laundering simply.
Meanwhile, the South Korean government has been pressured to release their verdict on the cryptocurrency space as the country does account for a huge amount of global Bitcoin trading. Their indecisiveness over their regulation has thrown the global prices of cryptocurrency in a turmoil. The Prime Minister of Korea is in a dilemma because he cannot completely ban cryptocurrencies in the country. This is because millennials favor cryptocurrencies and the fact that this group is his largest supporters makes the situation more complicated.
Despite this, they cannot leave the cryptocurrency market unregulated. Without proper regulations, this space will be increasingly used for money laundering, tax evasion, fraud, and other illegal activity. South Korea did not determine whether they will recognize digital coins as financial products or currency. However, the South Korean government has recently released a statement that the government does not guarantee the value of cryptocurrency. They also highlighted that investors would trade at their own risk.
The Justice Minister of South Korea added fuel to the turmoil by stating that all cryptocurrency exchanges must be shut down. The government later clarified this statement by stating that they will only regulate the space instead of entirely shutting down the whole industry. As part of the consideration, some of the exchanges, which were acting illegally, will be investigated.
Creating boundaries for foreign investors
South Korea is trying to decrease the speculation within the cryptocurrency world. With more investors from outside injecting money into coins, this increases the supply of cryptocurrencies circulating in the Korean market. This has a direct impact on the market and results in higher speculation. One of the reasons for banning the foreign investors from entering Korean exchanges can be attributed to Chinese investors who were seeking another cryptocurrency market to go to after their government completely banned the trading within their borders.
The problem arose when digital coins from China entered Korean exchanges. The investors then sell off the cryptocurrency and change it into foreign currency illegally. This is then sent back to China. It is incredibly difficult to track back the identity of the people engaging in these illegal activities. On top of that, it is happening too often for South Korea to ignore. The market manipulation by Chinese investors solidified the argument as to why South Korea doesn’t want any foreigners in the market.
For foreigners who already hold cryptocurrency trading accounts in South Korea, they will be allowed to trade their assets even after new rules are imposed on January 30. The only exception is that they are not permitted to make any deposits through the account. However, there is a potential loophole in the system because foreigners and minors can use corporate accounts to make additional investments instead of using their real names.
Everyone must undergo the ID verification system
Another important regulation being placed in South Korea is all cryptocurrency investors must establish an account under their legal name at one of the six banks. Anonymous cryptocurrency trading is not permitted to trade on domestic cryptocurrency exchange. This system was introduced to identify everyone who is trading on the cryptocurrency market.
On January 30, six banks will launch an ID verification system that will verify the identity of old and new users when they sign up for new cryptocurrency accounts. Furthermore, cryptocurrency exchanges must share users’ transaction data with banks. From here, regulators will monitor through banks to stop anonymous transactions. In the case where exchanges refuse to provide information, legal actions will be taken.
Many of the cryptocurrency exchanges are complying with the regulations set. Korbit, which is a major Korean cryptocurrency exchange, has stated that they will shut down virtual accounts by this month and they will allow trading with real name accounts through the Shinhan Bank. Meanwhile, Korea’s biggest exchange Upbit has partnered with the Industrial Bank of Korea. Coinone, which is joining up with NH Bank, told its users it would soon post instructions on how foreigners can continue trading on the exchange.
The regulations were created after the FSC found out that some cryptocurrency companies were manipulating some loopholes within the system. In fact, some companies that are dealing with cryptocurrency had been registered as shopping malls. When it comes to the identification of these corporate entities, it’s difficult for the customer verification procedure to happen smoothly. As mentioned earlier, it is also possible for people to invest through a corporate account. Over time, South Korea will develop a mechanism to help them to flag suspicious transactions.
The South Korea effect
As South Korea has one of the largest shares of Bitcoin trading in the world, it is undeniable that regulations being imposed by the government will affect the cryptocurrency market for Bitcoin. As these regulations come to light, many countries will be observing the way the South Korean government will impose these rules on cryptocurrency traders. As the nature of cryptocurrency is highly anonymous, it remains to be seen whether more investors will be willing to trade in the South Korean cryptocurrency exchange.
Many investors will probably consider moving their funds to another country where cryptocurrency trading remains anonymous. With the many risks of the cryptocurrency market, it is important for investors to consider whether cryptocurrencies are slowly converging into a centralized system, which opposes the main reason that cryptocurrencies were initially created.
More importantly, how will these regulations serve to benefit cryptocurrency investors in the long run? 2018 will slowly unfold the effect of these regulations, and surely, many other countries will be following suit with South Korea’s regulation implementation if it becomes successful.