South Korea, the country that has been in the forefront of the crypto industry since the 2017 investor boom, is gradually changing its views regarding cryptocurrencies. While the lift on the ICO blanket ban was announced by the officials last month, the country has recently been vocal about its intention to lead the fourth industrial revolution, powered by blockchain initiatives.
Brief history of crypto regulation in South Korea
South Korea has been closely regulating the crypto industry. First, in July 2017, the government legalized Bitcoin as a remittance method, allowing fintech companies to process up to $20,000 worth of South Korean won in Bitcoin for users. As a result, local exchange platforms were tied to the country's top financial regulator, the Financial Services Commission (FSC), which required capital of at least $436,000 to be retained, plus data processing facilities for Know Your Customer (KYC) and Anti-Money Laundering (AML) purposes in order to get the watchdog’s approval.
Thus, the Bitcoin industry in South Korea continued to grow — in July 2017, the local exchange market already processed over 14 percent of global Bitcoin trades, being the third largest market behind the U.S. and Japan — but soon it was hit with the Chinese-like blanket ban on ICOs, instituted by the FSC. The agency explained the move with rising risks of financials scams, triggering sell-offs in the market.
Further, in December 2017, the government notoriously banned anonymous trading on local exchanges (simply put, if your bank details don’t match the details you provide to the exchange, you can’t trade cryptocurrencies) after the South Korean prime minister stated that Bitcoin could lead kids “to illicit activities such as drug trading” — foreigners and minors were also banned from trading as a result of the policy; government officials were forbidden to hold or trade crypto later in March 2018. The market was stirred several times, reacting to the news. The panic intensified when an announcement emerged that Bitcoin trading was going to be banned altogether — however, it was soon dismissed by the Blue House, the executive office and official residence of the South Korean president.
Around that time, according to the country’s self-regulatory Blockchain Industry Association (KBA), the country had more than a dozen cryptocurrency exchanges, including Bithumb, Korbit and Coinone. The demand for crypto was so high that cryptocurrencies were traded at prices more than 30 percent higher than in other countries. Soon after the anonymous trading ban was announced, CoinMarketCap removed several South Korean exchanges from its listings — citing price divergence — provoking a severe dip in the market. Ripple (XRP) was particularly affected, as it saw an immediate loss of over $20 billion in market capitalization, and an almost 30 percent price drop.
On January 22, the South Korean government also announced a substantial tax levied on local crypto exchanges. Thus, all crypto trading platforms in the country are required to pay a 22 percent corporate tax and a 2.2 percent local income tax.
Big plans for blockchain
On May 29, The National Assembly officially proposed once again legalizing domestic ICOs. While plans to lift the complete ban on ICOs started to emerge as early as December 2017, it comes as no surprise that the authorized announcement was made just recently, as it appears to be synchronized with the government's pro-blockchain leanings. When Rep. Hong Eui-rak of the ruling Democratic Party of Korea first announced that lawmakers were working on the bill lifting the ICO ban, he mentioned:
"The primary goal (of the legislation) is helping remove uncertainties facing blockchain-related businesses."
Indeed, South Korea has been nurturing big plans for blockchain and recently started to act on them. On June 22, South Korea’s Ministry of Science and Technology (MSIT) and the U.S. State Department announced their cooperation in advancing the fourth industrial revolution at a press conference held in Seoul. The World Economic Forum (WEF), which defined the fourth industrial revolution back in 2016, recognizing blockchain as one of its primary movers from the very start.
Accordingly, the South Korean special committee on the fourth industrial revolution under the National Assembly stated at their last general meeting on May 28:
“We need to form a task force including private experts in order to improve transparency of cryptocurrency trading and establish a healthy trade order […] We will also establish a legal basis for cryptocurrency trading, including permission of ICOs, through the National Assembly Standing Committee.”
Similarly, South Korea’s interest in blockchain was confirmed yet again on June 21, as the country’s Ministry of Science and ICT announced a major Blockchain Technology Development Strategy that aims to raise 230 billion won (approximately $207 million) by 2022. The new initiative is expected to foster 10,000 blockchain industry professionals and 100 companies in areas including real estate, online voting, shipping logistics, real estate, and international e-document distribution, and to expand and monetize six existing blockchain pilots with the Ministry’s backing.
In May, even South Korea’s central bank began exploring the idea of using cryptocurrencies and blockchain. The government body turned to the technology in order to meet their goal of a cashless society by 2020. The major goals of the project are customer convenience and reducing the cost of producing physical currency.
South Korean businesses have also been implementing the technology. In April, South Korean telecommunications operator SK Telecom announced the release of an asset management service with blockchain technology, as well as a platform for linking blockchain startups with investors. According to the executive vice president of the telecom operator’s blockchain division “the service will allow users to manage all bank accounts, credit cards, mileage points and other non-financial assets, including cryptocurrencies, in one basket, and enable transactions of the assets based on trust.”
SK Telecom’s new platform, the Token Exchange Hub, will support the ICO of startups by offering both “technological and financial consultants.” Further, the Korean Customs Service has signed a memorandum of understanding (MoU) with the Korean operator of Malltail, the leading consumer parcel forwarding service, to develop a blockchain-based customs platform for the e-commerce industry and a group of South Korean commercial banks are set to launch a blockchain-powered customer ID verification platform in July 2018.
Moreover, on June 20, electronics titan Samsung revealed a new blockchain-powered logistics platform dubbed Cello 3.0 via Samsung SDS, the corporation's IT arm. Earlier in June, the company also announced a blockchain platform called Nexfinance with the purpose of enhancing the competitiveness of finance businesses. Its rival LG has also recently launched its own blockchain-powered service through a subsidiary company that focuses on information technology services. Called Monachain, the new platform has been designed to enable blockchain-based logistics in the fields of finance, manufacturing and communication.
Tougher stand on cryptocurrencies
Another reason for the reversal of the ICO ban are the brakes it put on the local crypto industry. When chairman of the Korea ICT Financial Convergence Association Oh Jung-geun revealed plans to launch a blockchain center in the city of Busan, designed after the Swiss Crypto Valley, he stressed that many South Korean companies are now forced to hold their ICOs overseas due to the government’s forbiddance, depriving the country of substantial business taxes. The government's approach to crypto in comparison to blockchain was also criticized by the head researcher of the Blockchain Research Center at Dongguk University Park Sung-joon, who argued that different approaches to blockchain and cryptocurrencies pose potential danger:
“In the digital asset trading market, virtual currency and blockchains cannot be separated because they need the appropriate means of payment.”
A stark example is Kakao’s plan to hold their ICO abroad. Kakao is a major South Korean internet company and service provider for major South Koreans with its mobile messaging app KakaoTalk. As Cointelegraph previously reported, Kakao’s applications have over 90 percent market penetration in their respective markets, including fintech, taxi service, messaging, and social media. The company is also focusing on integrating cryptocurrencies for its 12,000 merchants and over 100 million users.
In March, it announced plans for opening a blockchain platform aimed at the wider Asian markets. It is reportedly looking to hold an ICO, which could have prompted local lawmakers to ease the current regulations in order to keep Kakao’s operations within the country.
Nevertheless, the FSC remains skeptical. In March, soon after the news about the ICO ban being cancelled started to appear, FSC chairman expressed his concerns toward domestic ICOs, citing high risks involved for investors within the cryptocurrency market, namely Ponzi schemes and scams. The FSC also commented on the potential Kakao ICO, reminding about the current restrictions:
“Even if there is no prohibition on cryptocurrency or digital asset trading, there is a possibility that it [Kakao’s ICO] may be regarded as fraud or multi-level sales according to the issuance method. Since the risk is very high in terms of investor protection, the government has a negative stance on the ICO.”
That doesn’t come as surprising, giving the fact that the FSC — along with other regulators — have been regulating local exchanges in a noticeably tough manner. For instance, after the local exchange UPbit experienced a sudden visit from financial regulators on May 11 based on fraud allegations, the platform conducted an internal audit that allegedly disproved those accusations. Interestingly, Upbit is run by a subsidiary of Kakao.
Similarly, in April, major Korean crypto exchange CoinNest’s co-founder and CEO were arrested on charges of embezzlement and fraud, for supposedly transferring “billions of won” in customers’ digital assets into their personal accounts, and 12 crypto exchanges were ordered to improve customer protection in their contracts.
Moreover, in May, the Financial Services Commission (FSC) joined the ongoing probe into South Korean cryptocurrency exchanges that was originally initiated by the Financial Supervisory Service (FSS). Following a request from the FSS, the FSC will be checking bank accounts of Korean crypto exchanges concerning the compliance with AML standards and other fraud prevention measures.
According to the original Korea Times’ report, the main subject of the expanded audit would be Bithumb, the country’s largest crypto exchange with plans to popularize the use of cryptocurrencies. The fact that Bithumb was recently hacked while being under the authorities’ scope makes the situation even more complex. The Korea Internet & Security Agency (KISA) has reportedly sent their officers to Bithumb’s offices in Seoul to collect data and records from company computers.
Nevertheless, the newly appointed governor of the FSS has recently declared that he sees “some positive aspects” to cryptocurrencies. He also mentioned that the FSS will be working on crypto regulatory “issues” in collaboration with other regulators.
The future regulations will show if the government follows its plan to nourish the local crypto industry with positive policies. In March, South Korea’s Ministry of Strategy and Finance representatives mentioned that they will release a taxation framework for cryptocurrencies by the end of June. While the agency still hasn’t made any official announcements, local news outlet Chosun reported on June 22 that a capital gains tax of 10 percent was going to be introduced in one or two years. However, this was soon refuted by the Ministry of Strategy and Finance.