Cryptocurrencies and South Korea

By Max Mittleman

Over the past couple years cryptocurrencies have taken the world by storm. Cryptocurrency started with the creation of Bitcoin.[1] Ironically, the creator, Satoshi Nakamoto, never intended to create a currency.[2] The goal was a peer-to-peer electronic cash system, which morphed into the “currency” we know today as Bitcoin.[3]

What is Cryptocurrency?

            In the 90’s there were many attempts to create a digital currency.[4] It was not until 2009 when Nakamoto introduced Bitcoin that a successful cryptocurrency existed.[5] Cryptocurrencies are decentralized networks that are made up of Blockchains.[6] A Blockchain works as a public ledger what records all transactions that take place with a certain cryptocurrency.[7] Each transaction on the Blockchain is a file containing each parties coins that are transferred.[8] A cryptocurrency system requires six conditions: (1) no central authority, (2) the system itself has an overview of the units and ownership, (3) the system defines whether new units can be created, (4) ownership of units can be proven exclusively cryptographically, (5) the system allows transactions to occur, (6) if simultaneous transactions take place with one unit, only one can be executed.[9]

            There are various reasons people gravitate toward cryptocurrencies.[10] Some see cryptocurrencies as “the currency of the future” and believe it will eventually replace the traditional forms of money.[11] Some prefer the fact that cryptocurrencies remove central regulation of the money supply.[12] Others enjoy the anonymity involved with cryptocurrency because of the lack of centralization.[13]

            In January 2018, there were roughly 1,400 different cryptocurrencies on the market.[14] In December 2018, Bitcoin passed the $20,000 per coin mark.[15]  Other top cryptocurrencies include Ethereum, Litecoin, Ripple, and Bitcoin Cash.[16] However, no currency has come close to the value of Bitcoin, which currently trades at around $9,000.[17]

Problems with Cryptocurrencies

            With soaring popularity comes soaring concerns with cryptocurrencies. The biggest concern is market volatility.[18] Certain cryptocurrencies have seen price drops of over 49% in 24 hours.[19] These massive price swings can be the result of “Whales,” which are cryptocurrency holders with large enough holdings to manipulate the entire market by offering the sale of enormous amounts, which in turn triggers smaller investors to buy, which artificially drives prices up.[20]

            Another issue is “pump and dump ICO (initial-coin-offering) schemes.”[21] These are simply new crypto coins introduced to the market for investors.[22] Investors pay fiat money for these new coins, but the price attached to the new coins are essentially made up by the creators.[23] This creates a situation where prices are driven up on a new coin, people buy in with fiat money, then the creator cashes out and leaves the market.[24] The result is investors left with a worthless cryptocurrency and real money in the hands of a coin creator.

            Finally, the issue that has surrounded cryptocurrency since its inception: cybercrime.[25] When cryptocurrencies started they were utilized often by cyber criminals on the dark web to complete transactions for illegal materials.[26] Criminals gravitated toward cryptocurrency due to its anonymity and the fact that it is unregulated.[27] Now that cryptocurrencies are becoming more mainstream, criminals are hacking coin platforms and stealing the currency from investors.[28] Due to the nature of blockchains, there is little chance of recovering stolen funds, creating a large risk for investors.[29]

Government Responses

            Cryptocurrencies have become a debate among governments across the world.[30] Many believe that cryptocurrencies will create decentralized economies globally and have fought against the use of cryptocurrency for monetary transactions.[31] In the US, the federal government has not used any constitutional powers to regulate cryptocurrencies.[32] Several states within the US are working on bills to explicitly allow the use of blockchains for monetary transactions.[33] In the EU, most countries have been welcoming to the new form of money.[34] While cautiously monitoring the platforms, many EU bodies see the development of the cryptocurrency market as technological progress and views it as a valuable innovation.[35]

            While the US and EU appear to be cautiously optimistic, other countries do not have the same view. Asian markets have not been as welcoming to the digital currency. China has taken steps to reduce the use of cryptocurrency.[36] China banned Bitcoin in 2017 and its taking futher action to ban all exchanges.[37]

            Another key market: South Korea

South Korean Response to Cryptocurrency

            South Korea is the third largest market for cryptocurrency.[38] However, the government is not as interested as its citizens.[39] Due to the size of the South Korean market for cryptocurrencies, the market has taken major dips and spikes while the South Korean government weighs its final decision on the digital asset.[40] On January 11, 2018 the price of Bitcoin dropped 12% based on South Korea’s justice minister discussing a proposal for a Bitcoin ban.[41]

            The first steps South Korea took was to ban “initial coin offerings and . . . anonymous cryptocurrency accounts” in 2017.[42] In 2018, the government started discussing proposals for outright bans on cryptocurrencies as a whole.[43] Fueling the concerns for South Korea’s government was the fact that many cryptocurrencies were priced higher in the country than the rest of the world and as a result it viewed the exchanges as gambling.[44] Additionally, the government has raised concerns about tax evasion.[45] Further, government officials voiced concerns regarding money laundering and excessive speculation.[46] The Prime Minister, Lee Nak-Yon, has even said he is concerned “that cryptocurrencies might corrupt the nation’s youth.”[47]

            To add to the turmoil that is South Korea’s response to cryptocurrency, the head of economic policy coordination for South Korea, Jung Ki-joon, was found dead at his house recently.[48] It is initially believed to be a heart attack, but the circumstances surrounding the death leave questions unanswered.[49] One of Jung’s “colleagues raised the possibility that stress – following the increased pressure from crypto-related duties – led to Jung’s death.”[50]

            For the time being, South Korea will not ban cryptocurrencies entirely.[51] The governor of South Korea’s Financial Supervisory Service has said “that his organization is trying to normalize cryptocurrency trading.”[52] This is a major change in the cryptocurrency discussion involving South Korea, and an unexpected breath of fresh air for investors.[53] One new restriction; however, is that government officials in South Korea are banned from holding and trading cryptocurrencies.[54]

Conclusion

            The world of cryptocurrency is far from settled. The extremely volatile markets will continue to fluctuate with some calling bust and some calling boom. Whether cryptocurrencies become mainstream forms of money is a question that will not be answered for some time. It will be important to watch what governments, particularly South Korea, do going forward. The market for cryptocurrencies will be a raging debate until final proclamations are made, but for now it appears to be a lucrative market for the investors who got in early.

[1] Ameer Rosic, What is Cryptocurrency: Everything you Need to Know [Ultimate Guide], Blockgeeks (2017), https://blockgeeks.com/guides/what-is-cryptocurrency/.

[2] Id.

[3] Id.

[4] What is Cryptocurrency. Guide for Beginners, Coin Telegraph (Dec. 5, 2017), https://cointelegraph.com/bitcoin-for-beginners/what-are-cryptocurrencies#history.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Jan Lansky, Possible State Approaches to Cryptocurrencies, Journal of Systems Integration, 1 (2018).

[10] James Royal, Cryptocurrency for Beginners: 7 Questions to Ask, Nerdwallet (Jan 11, 2018), https://www.nerdwallet.com/blog/investing/cryptocurrency-7-things-to-know/.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] William Suberg, Bitcoin Hits $20,000 Per Coin, Capping Year of Enormous Growth, Coin Telegraph (Dec. 17, 2017), https://cointelegraph.com/news/bitcoin-hits-20000-per-coin-capping-year-of-enormous-growth.

[16] Top Cryptocurrency List, Bit Info Charts (2018), https://bitinfocharts.com/top-cryptocurrency-list.html.

[17] Id.

[18] Major Problems in the Cryptocurrency Market, Hackernoon (Jan. 25, 2018), https://hackernoon.com/major-problems-in-the-cryptocurrency-market-c9c9ff53b266.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Rodolfo Melgoza, Cryptocurrency’s Impact on Cybercrime, Fortscale (Jan. 11, 2018), https://blog.fortscale.com/cryptocurrencys-impact-on-cybercrime.

[27] Oliver Rochford, Cryptocurrencies and the Revolution in Cybercrime Economics, Security Week (Mar. 7, 2018), https://www.securityweek.com/cryptocurrencies-and-revolution-cybercrime-economics.

[28] Hackernoon supra note 18.

[29] Id.

[30] Divya Joshi, How the Laws & Regulation Affecting Blockchain Technology can Impact its Adoption, Business Insider (Oct. 20, 2017), http://www.businessinsider.com/blockchain-cryptocurrency-regulations-us-global-2017-10.

[31] Id.

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] Rosie Perper, China is moving to eliminate all cryptocurrency trading with a ban on foreign exchanges, Business Insider (Feb. 5, 2018), http://www.businessinsider.com/china-eliminates-all-cryptocurrency-trading-2018-2.

[37] Id.

[38] Swapna Krishna, South Korea Won’t Ban Cryptocurrency Trading After All, Engadget (Feb. 20, 2018), https://www.engadget.com/2018/02/20/south-korea-no-ban-on-cryptocurrency-bitcoin-trading/.

[39] Kyungji Cho, Why the Cryptocurrency World is Watching South Korea, BLoomberg (Feb. 4, 2018), https://www.bloomberg.com/news/articles/2018-02-04/why-the-cryptocurrency-world-is-watching-south-korea-quicktake.

[40] Id.

[41] Id.

[42] Krishna supra note 38.

[43] Id.

[44] Id.

[45] Id.

[46] Cho supra note 39.

[47] Id.

[48] Evelyn Cheng, South Korean Cryptocurrency Official Found Dead at Home, Reports say, CNBC (Feb. 20, 2018), https://www.cnbc.com/2018/02/20/south-korean-cryptocurrency-official-found-dead-at-home-reports-say.html.

[49] Id.

[50] Id.

[51] Krishna supra note 38.

[52] Id.

[53] Id.

[54] Helen Partz, South Korean Government Bans Officials From Crypto Holding and Trading, Coin Telegraph (Mar. 6, 2018), https://cointelegraph.com/news/south-korean-government-bans-officials-from-crypto-holding-and-trading.