The total value of cryptocurrencies surged past $500 billion last Wednesday for the first time ever. Exponential growth in bitcoin’s trading volume has attracted people without finance or IT backgrounds to the cryptocurrency, creating huge demand for the alternative asset class. South Korea has emerged as a major player in this space, with local residents becoming engrossed in the mobile-app based trading platforms in the hope of earning quick profits. In doing so, they have ignored the warnings issued by the government. South Korea currently ranks the third in bitcoin trading, after Japan and the U.S. According to a recent MIT Technology Review report, South Korean-based Bithumb and Coinone are among the top 15 global digital currency exchanges.
South Korea feels that the wild wave of cryptocurrency should be reigned in and is at present looking forward to regulating the domestic exchanges. It is believed that more than one million registered users trade the virtual currencies daily. That’s equivalent to about one out of every citizen, giving the federal government plenty of reason to worry.
ICO Ban and Tax Regulation
The Financial Services Commission (FSC) of South Korea had banned initial coin offerings (ICOs) in September, but the ban was quickly lifted on the condition that the market will still be subject to strict regulations. The country’s Financial Supervisory Service (FSS) first announced in November 2017 that the agency is examining cryptocurrency trading within the country. Moreover, the National Tax Agency is in the process of introducing a Value Added Tax or a capital gains tax or both on cryptocurrency trades. South Korea will join the small group of countries that have introduced a tax on cryptocurrency-to-cash exchanges.
Another concern for the South Korean government is the increasing risk of cyber attacks from North Korea. The target of the totalitarian government of North Korea is to convert bitcoin and other cryptocurrencies into U.S. dollars , giving them plenty of profits. This is the main reason for the regime led by Kim Jong-un to hack the cryptocurrency exchanges that are based in rival countries. The National Police Agency of South Korea claims that their unfriendly neighbor may be specifically targeting domestic bitcoin exchanges. On implementation of these regulatory measures, North Korean banks will not be able to open cryptocurrency accounts for minors. Neither will they be able to open such a bank account without proper identity verification. It has been reported that the Korea Development Bank and Woori Bank are going to close all virtual accounts offered to the crypto exchanges by the end of 2017.
To handle cyber attacks, especially from their neighboring country, the regulatory bodies of South Korea are pressurizing the cryptocurrency exchanges to fortify storage security of the encryption keys, verify the real names of the users, and disclose Buy and order volumes.
“A virtual currency exchange, which has more than 10 billion won in sales such as Bithumb, Coinone and Korbit, or more than 1 million visitors per day, is expected to receive the government’s ‘Information Security Management System (ISMS)’ certification next year.” Hankyung publication.
Conditions South Korean Crypto Exchanges Must follow to Operate Legally
The following list represents the conditions South Korean exchanges must follow to operate legally in the country:
- The cryptocurrency exchanges must store their customers’ funds separately.
- There should be a healthy dose of warning regarding trading crypto assets. The exchanges should thoroughly explain investment risks to their clients.
- They should ask for documents that will verify their real name and residential address.
- The cryptocurrency exchanges should employ an asset protection system like the dispersion of cryptographic keys. They should also implement a strict anti-money laundering system.
- The transaction details should be accessible to the public for a more transparent system.
- The exchanges should increase penalties in case there is any indication of malpractices.
Impact of South Korean Emergency Measures
The following represents the impact of South Korea’s emergency measures on the nation’s existing crypto regulations:
- The emergency measures for regulations taken by South Korea will most certainly solve some of the security issues and is also expected to reduce the threat of cyber attacks.
- Minors will no longer be able to trade cryptocurrencies through the exchanges of South Korea.
- Under this regulation, the profits made through trading crypto assets will also be liable to taxation.
- Following up on the previous point, anyone trading through Bithumb, Coinone or other South Korean cryptocurrency exchanges will have to pay the taxes. The government hopes that it will check overtrading of cryptocurrencies.
- The measures will thus decrease profit volume.
- Foreigners who are not residing in South Korea will not be able to trade cryptocurrencies through South Korean exchanges. Other countries will not have access to the crypto assets offered by South Korean crypto exchanges.
- Traders who already own cryptocurrencies will not be conduct additional trades.
Thus, the regulations and tax policies about to be implemented by the South Korean government regarding cryptocurrency trading will have surreptitious advantages for its citizens. They will have a more secure trading experience. The downside is that their profit volume will decrease compared to the cryptocurrency traders from other countries. Another disadvantage is foreign investors will not be able to trade cryptocurrencies through South Korean exchanges. The step taken by the legal bodies of South Korea is an attempt to regulate the tide of crypto coins and to prevent phishing attacks.