As at 17:56 GMT the rate of Bitcoin to U.S. Dollar (BTCUSD) was 10,539.0. This marked a decline of USD$834.00; a change on the trading day of -7.34%.The reason for the decline is news that non-Korean investors may find that access to South Korean exchanges is off limits after January 31.There can be no doubt that the exchanges within South Korea have a reputation for being the most vibrant cryptocurrency trading venues. They have long been a magnet for global investors…or as some would say, speculators, given the unparalleled breadth of market, trading volumes and aggressive pricing.The motivation behind the change to the rules and increased restrictions can be traced back to a sense of urgency in enforcing a defined parameter for cryptocurrency trading. It has long been felt that the arena of cryptocurrencies, its speed of use and anonymity was a major attractor to shadow operators that boarded on the illegal. This has drawn accusations of criminal world money-laundering; therefore, the market has attracted greater scrutiny.
No comment from the exchangesAs this is written, there is no statement issued from “BitHumb,” the largest Korean crypto exchange that it would ban foreign accounts. It is felt, however, that rival exchange “Korbit” may be the first to limit this type of trading to non-residents.Last week, raids on South Korean exchanges were seen as the opening shot in a nationwide crackdown on cryptocurrencies to protect ordinary investors. There was speculation that the exchanges would be closed completely when the Justice Minister announced an imminent ban on cryptocurrency trading, only to be publicly rebuffed by citizens through an online petition that amassed over 200,000 signatures.
The government issued a statement in a response to calm South Korea’s crypto devotees as it stated no ban would take place without further consultation. Clearly, they meant an internal ban as it looks as though the authorities want the door shut to non-residents in nine days’ time.Homeless but free to flow across frontiersOne could call such a move discriminatory toward foreigners; however, the issue of money laundering refuses to go away and it appears that that is one problem South Korea could do without.Another factor to consider is found within the fact that cryptocurrencies have no home.There is no central banking authority in charge and by being borderless, Bitcoin and its ilk are an easy vehicle with which to engineer a rapid outflow of funds. Certainly, the Chinese authorities were extremely keen last year to stamp out an abuse of internal capital controls, where Bitcoin was actively used to take funds out of the country and in doing so, run rings around local and national laws.However, of all the problems South Korea faces one of the most pressing is that of cryptocurrency exchange “hack attacks” and security breaches. North Korean government sponsored actors, specifically the “Lazarus Group”, continued to target South Korean cryptocurrency exchanges and users into late 2017, before Kim Jong Un’s New Year’s speech and subsequent North-South dialogue. In February last year Bithumb lost USD 7 Million in a cryptocurrency hack orchestrated by North Korea.For all the niceties and an agreement to march together at the Pyeongchang Winter Olympics can the South trust the North? It could be that Kim Jong Un is just buying time and before long, as new sanctions bite hard, his agents will work to syphon more funds away from the South.
Rapid growthBithumb, has become akin to a cash cow. The number of accounts being registered on the exchange run into the millions. It has approximately 100,000 users trading on its platform at any given minute. This volume means it is responsible for over 80% of Korea’s online Won trade. The growth has been so rapid that the exchange platform has been staging a constant battle to keep its infrastructure large enough and appropriately secured to keep up with demand.This is not a “Korea-Specific” problem as other large exchanges, for example, in the United States such as “Gemini” started by the Winklevoss twins’, or the startup “Coinbase”, have both endured regular outages and interruptions throughout 2017.Across the world, cryptocurrency platforms are wilting under the strain of millions of new users. This is a consequence of not introducing “SegWitz2” and its extra capacity last November.
India suspends accounts of multiple Bitcoin exchangesIndia has joined the process of introducing account suspensions in a move that will have significant implications as the nation accounts for over 10% of international Bitcoin transactions. This move has been motivated by suspected abuse and suspicious transactions.Several leading lenders such as State Bank of India, Axis Bank BSE, HDFC Bank BSE, ICICI Bank, and Yes Bank collectively acted to suspend select accounts across multiple Bitcoin exchanges. They have also moved to demand additional collateral, while also imposing a cap on cash withdrawals from accounts that are still operational.
Accounts were frozen abruptly, prompted by an investigation and the subsequent discovery that many were being used for reasons other than those given at the time of opening. That switched on a warning light for the regulators and in addition to the accounts that have been suspended many others are currently being investigated.With cash withdrawal limits imposed, the situation appears to have the potential to take an even deeper draconian turn. More accounts would seem set for suspension in the next few weeks.The slow drip-feed on enhanced regulation and restriction is certainly proving to be a fetter to Bitcoin et al. That will simply heighten the downside risk paving the way to serious financial losses.
Stephen Pope has over 30 years of experience in the international capital markets and is Managing Partner at Spotlight Ideas.