South Koreans flock to crypto amid a heavy-handed regulation approach
With crypto demand skyrocketing in South Korea, the government is looking to regulate digital assets and the local market is feeling the pressure.
In South Korea, one in three citizens either own cryptocurrencies or get paid in them. One-tenth of its population trades digital assets, and its youth unemployment rate hovers above 10%. It’s a competitive job market in the East-Asian nation, where high expenses enforce hierarchical social structures, and financial stability can seem like a pipe dream.
On matters of technology and innovation, South Korea is incredibly progressive. There’s been a lot of buzz around cryptocurrencies since news of their existence became common knowledge in the country.
Its open-minded attitude to technological progress could mean that the country will decide to regulate — instead of banning — blockchain-based tokens. However, with gambling considered illegal under South Korean law, and many projects leaning too heavily on the speculative side of things, some firms will probably face increased scrutiny.
On the surface, South Korea has one of the world’s strongest economies — being the fourth-largest in Asia and 10th-largest globally — with an extraordinary human development index and only moderate levels of income inequality. However, beneath the surface, a financial revolution is seemingly brewing, and blockchain is at the heart of it.
The South Korean stock market is dominated by four family-owned conglomerates or “chaebols,” which many believe are highly corrupt and politically influential. Recently, reported volumes on top Korean cryptocurrency exchanges surpassed the country’s stock market, which could be a sign that the people are making their intentions clear.
As a country, South Korea is a prominent contributor to cryptocurrency volumes worldwide. Digital assets are part of the culture there, enabling many young citizens to get by despite Korea’s rising youth unemployment rates. Having long adopted the concept of micropayments through its obsession with video games, South Korea was ready for digital assets before cryptocurrencies even existed.
The country also has the world’s fastest internet speeds, and its citizens are familiar with mobile payment systems due to the nation’s robust telecommunications industry. In 2019, the country introduced its own cryptocurrency through a government initiative, the S-coin.
However, the government passed legislation later in March 2020 to clamp down on blockchain investments, and the citizens of South Korea, especially its youth, were not happy. Mark Lee, founder of South Korean blockchain marketing agency Eightfive, told Cointelegraph: “South Korea is quite conservative when it comes to speculative products. The high youth unemployment numbers are often seen as one reason many young people are drawn to Bitcoin and other cryptocurrencies.”
According to reports from local news outlets, the South Korean youth are leaving their jobs to explore day-trading cryptocurrencies. Most of the Korean nationals view digital assets as a means of wealth generation that’s far more rapid than their day jobs could ever provide. It’s come to the point where some companies have started threatening to block crypto exchanges on their networks, preventing their employees from checking in on price fluctuations during the day.
“Different concerns exist in different jurisdictions,” said Ben Caselin, head of research and strategy at South Korean cryptocurrency exchange AAX, adding: “In South Korea, perhaps more than anywhere else, there is a very real concern over capital flows, especially in relation to North Korea. We can, therefore, expect a continued tightening of regulations in South Korea.”
In March, to ensure compliance with Anti-Money Laundering regulations, South Korea’s top financial regulator, the Financial Services Commission, or FSC, ordered that cryptocurrency exchanges needed to have a “Virtual Asset Service Provider,” or VASP, license to operate.
They also told exchanges that they had until September to comply, but during a policy committee meeting of the National Assembly on April 22, FSC chairman Eun Sung-soo said the FSC hadn’t yet received any VASP applications. Sung-soo also stated that if the current trend continues, over 200 exchanges will have shut down by the end of the year.
Last month, South Korean exchange Daybit announced that it would be halting operations due to difficulties finding a banking partner amid the new regulations, but even bigger players are facing similar challenges. Earlier this year, OKEx closed its Korean platform, citing issues with the new Anti-Money Laundering rules, as well as Binance Korea shutting down services in December — just eight months after its launch.
National issues, global consequences
The “big four” exchanges in the country — Bithumb, Coinone, Upbit and Korbit — registered nearly 2.5 million new users in Q1 of 2021 alone, with 64% of them between the ages of 20 and 30. In fact, traders in their 30s out-spent every other demographic, producing over $398 million in trade volume over the quarter.
“Surprisingly, Bitcoin is relatively not as popular in Korea,” said Min Kim, founder of the South Korean enterprise blockchain solutions platform Icon. “For example, BTC ranks #10 in trading volume on Upbit, Korea’s largest exchange,” he said, adding: “Koreans are investing heavily into altcoins today because they look at crypto as a lottery ticket.”
The nation’s youth is heavily dependent on these exchanges, and shutting them down would deal a severe blow not just to the young investors of South Korea but to the global cryptocurrency market. There are also internal social class conflicts in the country, making crypto incredibly appealing to younger generations.
“South Korea is quite conservative when it comes to speculative products. The high youth unemployment numbers are often seen as one reason many young people are drawn to Bitcoin and other cryptocurrencies,” said Lee, continuing: “Political uncertainty is also a concern, and because Bitcoin is not attached to any state, it’s appealing to man.”
The FSC chairman also recently ordered all FSC officials to have reported their cryptocurrency holdings by May 7, though penalties for violating these measures are supposedly not too harsh.
According to reports, only the big four cryptocurrency exchanges are likely to sign up and receive VASP licenses by the deadline. While this won’t kill cryptocurrency trading in South Korea entirely, it could lead to a consolidation of crypto-related resources within the country. Caselin added:
“In South Korea, perhaps more than anywhere else, there is a very real concern over capital flows, especially in relation to North Korea.”
According to Kijun Seo, CEO of decentralized video game development studio Planetarium, “the government is still trying to figure out how to oversee investment and speculative activities, with new tax and registration laws being implemented this year.”
In February, the nation’s finance ministry fast-tracked by introducing a new 20% tax on cryptocurrency profits exceeding $2,230, which is now expected to have passed into law by January 2022.
Sung-soo also recently came under fire for his negative remarks about cryptocurrencies, spurring over 300,000 outraged citizens to sign a petition calling for his resignation. Conflict between the people and the government is unlikely to solve any problems, but without sound regulation, it doesn’t make sense for any government to open its arms to cryptocurrencies.
Regulators have genuine concerns about its pseudonymous nature, but with how positive the country is about blockchain, ensuring a healthy cryptocurrency market in South Korea isn’t just a national problem — it’s a global one.