Friday September 29 was a peculiar day for bitcoin enthusiasts in East Asia. While Japan’s government moved to officially recognize 11 cryptocurrency exchange operators, and while South Koreans were gearing up for a 10-day public holiday, the Seoul government pulled a move that blindsided many.
With China’s bitcoin market in tatters following a digital currency crackdown that left domestic investors “fuming,” Seoul was widely expected to continue promoting its fast-growing digital currencies market. Instead, it stumped much of the financial world – by following suit with China.
South Korea’s ban on initial coin offerings (ICO) was sudden, almost completely unexpected, and was given considerable weight by the manner of its announcement. The ruling was delivered by the country’s Financial Services Commission (FSC) – after consultation with not only the Ministry of Finance, but also the national tax authorities and the country’s central bank.
Moreover, the timing was painfully awkward. One of the country’s biggest tech giants, Kakao Corp, had only just announced the launch of a wide-ranging, Bittrex-powered cryptocurrency trading platform – a move that would almost certainly take digital currencies mainstream in South Korea were it not for the ICO ban.
And with many of Asia’s markets about to close for the mid-fall harvest festival holidays, there was little if any time for anyone on the continent to take the news in – or respond to it in any meaningful way.
As Koreans get back to work this week, the impact of the ICO ban is now coming under closer scrutiny. But despite the somewhat shocking events of September 29, there are plenty of reasons to believe that the move will not spell the end of Korea’s bitcoin boom.
The most optimistic of analysts expect the ICO ban to act as little more than a stopgap, essentially buying the government and regulators some time.
Seoul believes that bitcoin-related scams are on the rise, and that South Korean criminals are using digital currencies to finance drug deals. The FSC issued a press release outlining some of its reasons for the ban, citing numerous recent court cases and police reports where criminal gangs have stayed off the radar by using bitcoin payments. The FSC also voiced concerns over possible bitcoin-related data breeches, with North Korean hacks a very real threat.
In addition to the ban, the government has also passed a law that states digital currencies can only be traded on exchanges after a recognized bank has confirm an account holder’s authorization status. On-the-spot regulatory checks have also been green-lighted, providing yet more boundaries for the country’s digital currency exchanges.
Much of the concern stems from the high-profile hack of Bithumb, the country’s leading bitcoin exchange, in summer this year. Over 30,000 users had data stolen – and large sums of money as well in many cases. The fallout caused the government to act, and has perhaps indirectly brought about the ICO ban.
Cause for optimism
Despite the Bithumb hack, cryptocurrencies had been having a very good year prior to the ICO bans. In fact, despite the holidays, some have already been busy, post-ban – including Bithumb itself. The exchange platform has added a new digital currency: Zcash, in a move announced on October 3. The move brings Bithumb’s list of supported digital currencies up to nine.
Speaking just after China’s ICO ban, the CEO of Coinone, South Korea’s first physical bitcoin exchange, was full of optimism, saying, “China won’t be able to go about-face alone, against the global markets’ vision to change the future. Markets will soon pick up the pieces from the damage done.”
Indeed, even some Chinese government officials remain skeptical about the longevity of the Middle Kingdom’s ICO ban, referring to it as something more akin to a “pause.” China has too much to lose from a permanent digital currency shutdown – an eventual easing of regulations is a more likely outcome.
If that line of thinking turns out to be correct, there is no reason not to assume that Seoul’s move is just as temporary – buying the government time to organize its digital legislation before it repeals the ban. Should the country feel it has the tools it needs to regulate virtual exchanges, it could well reopen them – almost as quickly as it closed them.
Beijing’s crackdown appears to have been motivated by a fear of bitcoin-financed “financial fraud and pyramid schemes.” And judging by the tone of the FSC’s statement, putting a lid on fraud and crime is also one of the South Korean government’s primary concerns right now.
Indeed, one digital currency analyst says, “The [South Korean] government is concerned with scams. I think it’s a temporary measure.”
Door not closed
South Korea was the world’s fourth biggest digital currency trader before China’s crackdown, and even moved into third place following Beijing’s clampdown.
To completely close the door on bitcoin would be to cede all regional influence in digital currencies to the country’s most bitter rival, Japan – something few analysts anticipate happening in the long term. South Korea remains committed to fintech and blockchain implementation – and arguably sees developing a healthy digital currency market as equally important.
Only a few months ago, Korean lawmakers were talking about legalizing bitcoin, and last year, the FSC chairman was singing a very different tune altogether, pledging, “The government will push for the full-scale systematization of digital currency.”
One would be ill-advised to take anything for granted in the world of digital currencies, especially in East Asia, where policy changes are fast and frequent.
But South Korea simply has far too much to lose from a total, long-term bitcoin shutdown. The fact that companies of the size and influence of Kakao are moving ahead with their virtual currency operations regardless of the ICO ban should allay most serious fears.