Over the past sixty years, South Korea has transformed from a society of subsistence farming to one of the most technologically advanced countries on earth.
This willingness to embrace new technology has consistently put the country ahead of the curve: South Koreans were early adopters of social networks—using CyWorld four years before MySpace emerged, and experimenting with smartphones while the rest of the world was still fiddling with flip phones.
Combined with high youth unemployment and a sluggish economy, this pioneering spirit has helped make South Korea the third largest bitcoin market in the world—sitting behind only Japan and the United States.
So keen were South Korean crypto buyers in the bull run of 2017, that they paid a 'kimchi premium' of up to fifty percent to buy bitcoin in Korean Won, and doctors in the country created an official diagnosis of 'bitcoin zombies' to refer to investors who couldn't stop checking the price.
In response to this tidal wave of interest, South Korean regulators took a firm stance against cryptocurrency, and only began to reconsider their approach as the 2018 bear market set in.
Since then, the government has played a proactive role in laying out regulations to govern cryptocurrency use.
Just as bitcoin was hitting all-time-highs in late December 2017, South Korean regulators labelled the trend "irrational", and floated the idea of completely banning cryptocurrency to cool off the market.
Then on December 20th, authorities indicted nearly two dozen people for involvement with a digital currency mining Ponzi scheme, concluding that digital currency could not be considered a legitimate financial product.
This triggered a tightening of cryptocurrency regulations, and shortly afterwards on January 30th 2018, South Korea made its first concrete measure aimed at digital currency exchanges—FSC vice chairman Kim Yong-beom banned anonymous trading on domestic exchanges, along with restricting foreigners and minors, preventing users from registering more than one account per exchange, and mandating that digital currency exchanges share user transaction data with banks.
The regulators also made clear their stance on ICOs—prohibiting domestic companies and startups from participating in coin offerings, and pushing token projects out to Switzerland or Singapore to avoid the risk of a potential shutdown.
Many blamed the crackdown for catalysing the cryptocurrency bear market that followed.
As prices fell, the 'kimchi premium' quickly turned into a discount, and former 'bitcoin zombies' were diagnosed with the 'bitcoin blues' as they realised that cryptocurrency couldn't provide an escape from the relentless pressure to succeed, or a way to afford spiraling house costs.
Since then, South Korean authorities have relaxed their approach—steering the digital currency market toward greater regulation, and setting several global precedents on handling difficult aspects of the ecosystem like privacy coins and exchange hacks.
On May 30th 2018, after crypto-friendly leader Yoon Suk-heun took over leadership of the Financial Supervisory Service (FSS), South Korea’s top court made a landmark ruling that recognised digital currency as an “asset with measurable value."
Shortly afterwards, the South Korean government began softening their stance by introducing bills to legitimise cryptocurrency in the eyes of the law.
Proposals were introduced to lift the ICO ban and make this new form of funding available to entrepreneurs, but with added checks to prevent fraud and protect consumers.
This ICO proposal is still being mulled over to date, but two months later in July 2018 the industry was further legitimised by new government proposals that recognised crypto exchanges as regulated financial businesses.
In August 2019, exchanges were then brought under greater control as the Financial Intelligence Unit (FIU—an arm of the country’s Financial Services Commission—began to introduce a licensing system for local exchanges with the aim of enhancing transparency in transactions in line with G20 guidelines on KYC and AML requirements.
In two other forward-thinking moves, South Korea has mirrored the actions of neighbour Japan by encouraging exchanges to delist privacy coins, and holding exchanges accountable for user losses.
The first precedent was set in September 2019 when South Korean crypto exchange Coinone was ordered to pay a trader 25 million Korean won ( $21,000) after he suffered a hack. This landmark motion represents the reversal of a trend that has been in place since the hack of Mt Gox in 2014, when crypto traders were first forced to swallow the cost of security breaches.
Most recently, this trend played out when South Korean exchange Upbit lost nearly $50 million worth of ether (ETH) cryptocurrency from a hack to its hot wallet. But instead of transferring the losses to traders, the exchange published a statement saying it would be covering the losses with its own assets.
The government is also thought to have pressured local exchanges to drop privacy coins, leading South Korean exchange Upbit, and the South Korean arm of Hong Kong exchange Okex to drop support for cryptocurrencies including Monero (XMR), dash (DASH), and Zcash (ZEC).
Along with these measures, which are ostensibly aimed at protecting investors, South Korean regulators have encouraged blockchain adoption by supporting the development of projects by top local tech companies including LG and Samsung, particularly in the port city of Busan which has been declared a “regulation-free” zone to foster innovation,
Looking ahead, we are likely to see the South Korean government introduce more proactive cryptocurrency regulations, which could play a key role in supporting the country's goal of transitioning to a cashless society by 2020.
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