A whirlwind of cryptocurrency-centric activity has recently spun through South Korea, affecting global crypto-markets and highlighting several important issues that could herald nation-states' increasing seriousness about cryptocurrency in 2018.
Specifically, South Korean monetary regulators will begin – as of January 30, 2018 – to utilize and enforce what is being referred to as a "real name" verification system. This tool is intended to help rein in growing concern by South Korean officials that cryptocurrency trading within their borders was beginning to surge beyond their control, potentially endangering the enforceability of anti-money-laundering (AML) legislation. The "real name system" represents a crackdown on bank accounts that are registered under fake names and which link to cryptocurrency exchange accounts.
The Insider Trading Scandal
Adding significance to the overall initiative to curb money-laundering concerns associated with anonymized bank accounts are recent comments from South Korean prime minister Lee Nak-yon, who – according to local media – instructed ranking governmental officials to "come up with stronger codes of conduct for public servants after a financial watchdog official was found to have profited from information on cryptocurrency regulations."
According to an official investigation, shortly before the panic-causing television broadcast by Justice Minister Park Sang-ki, an unnamed Financial Supervisory Service (FSS) employee with advance knowledge of the problematic broadcast sold their cryptocurrency holdings, netting a profit of about 7 million Korean won, or $6,500.
This alleged insider cryptocurrency trading by a well-positioned official at South Korea's supreme financial watchdog, the FSS, ignited outrage amongst the domestic population in South Korea.
Not incidentally, the insider trading scandal resulted from a televised broadcast meant to provide the South Korean cryptocurrency ecosystem with updated regulatory information. Many watched Justice Minister Park Sang-ki give what should have been a simple statement about the possibility of banning cryptocurrency trading if things spun out of control. But instead, the population at large came to believe that cryptocurrency in South Korea would be banned outright.
Government Foments Fear, Uncertainty, and Doubt
Following those comments by the justice minister, more than 120,000 spooked Koreans signed an online petition opposing the potential ban, briefly crashing the Blue House website where it was posted. Emotions were heightened during the signing of the petition, as knowledge of the insider trading scandal began to break simultaneously.
The perceptions surrounding cryptocurrency developments in South Korea had indeed become so inundated with confusing information, the wide-scale misunderstandings prompted an official announcement from South Korea's executive branch early last week. On January 15, a statement – which originated from President Moon Jae-in – was delivered via spokesperson:
"The cryptocurrency trading ban proposal introduced by Justice Minister Park Sang-ki was a suggestion made by the Justice Ministry on December 28 to bring speculation within the cryptocurrency market under control. The proposal will be discussed and changed by the task force participated by the Ministry of Strategy and Finance, central bank, Fair Trade Commission, and other agencies."
The President's proxy then noted the administration's continued interest in the foundational element of cryptocurrencies: "But, the government will support and even finance blockchain technology development."
Governmental clarification has indicated that only those crypto-exchanges that remain noncompliant with the new identity regulations will be closed. This means traders must relinquish anonymous accounts, and observe a strict government mandate to register all accounts associated with cryptocurrency transactions under their owner's real names. Now, the gravity of South Korea's "real name system" is quickly emerging as the force that the future of anonymous, decentralized cryptocurrency may revolve around.
The Real Name Verification System
"Banks will switch to real name policy starting from January 30 that only allows accounts with a user's real name to be used in cryptocurrency trading. Under the new rule, users who want to make cryptocurrency transactions must have accounts under their real names at the same banks where cryptocurrency exchanges open their accounts."
-South Korean FSC
According to the FSC, Korea's "real name system" is intended to verify that both banks and their customers are in compliance with anti-money laundering (AML), know-your-customer (KYC), and taxation laws.
Local Korean media has reported that the "real name system" will in part be a data-sharing initiative between crypto-exchanges and traditional banks. Sharing user data across financial systems will surely enhance AML efforts, although many believe that the real reason behind this data collaboration might be to empower the government to collect taxes on cryptocurrency.
The thought of a government system, list, or database naming approved users leaves many feeling unnerved, especially since the issue at hand is cryptocurrency trading. While privacy advocates believe that a nationalized database – the "real name system" – of cryptocurrency users is a step in the wrong direction, the FSC expressed that its action is meant to "minimize side effects of cryptocurrency trading such as money-laundering and tax evasion." The FSC took time to note that the new regulation is "not intended to formally institutionalize cryptocurrency exchanges, or facilitate cryptocurrency trading through such platforms."
South Korea already has experience implementing a "real-name" transaction-verification system. The government first introduced one in 1993 to expose shady financial dealings. Now, newly revised laws state that violators who use fake names to register bank accounts related to cryptocurrency trading could be imprisoned up to five years, and face fines up to 50 million won, approximately $45,000.
The creation of a "real name system" is controversial, but if these actions lead to legitimate regulation, the larger implications may prove to be a rallying cry for cryptocurrency in South Korea (and possibly throughout the world) over the long term. The planned reforms could bring to the fore the peripheral concerns that have been lurking behind blockchain privacy debates for years.
Going forward, foreign traders lacking a local Korean bank account – as well as outside entities that have been collaborating with investors inside Korea – are both going to be forcibly excluded from cryptocurrency investing after January 30, 2018.
Key points emphasized in the FSC statement were also echoed by the commission's vice chair, Kim Yong-beom, during a press briefing on January 23, where he discussed the reforms ahead of their activation at the end of the month. According to the Associated Press, Yong-beom confirmed that foreigners without scrutinized, local bank accounts, and Korean minors under 18 years of age, will be prevented from cryptocurrency trading inside South Korea. Many deem these reforms prudent for a nation with heightened crypto-trading and, consequently, heightened responsibility.
In 2017 South Korea was the largest market for Ether, the fuel that powers Ethereum, accounting for more than 33 percent of its total market share. Moreover, the insatiable domestic appetite for cryptocurrencies in South Korea created a price premium on both Bithumb and Coinone, two of the largest crypto-exchanges in the world.
The premiums that manifested on Korean exchanges, while ambiguous and complex in origin, are likely partially tied to cultural justifications. South Koreans enjoy above-average internet speeds, are highly technological as a society, and have extensive understanding of online payment services. These techno-social attributes have helped cryptocurrency penetrate into the national psyche broadly. Adoption has been so pervasive, in fact, that Bithumb and Coinone each made sure to include walk-in offices on site where investors can purchase cryptocurrency in person. In South Korea, crypto truly runs deep with people.
ETHNews will be following Korean cryptocurrency developments and providing updates as necessary. For now, a trend is emerging on the Korean peninsula where regulation is requiring action across fiat, crypto, and retail vectors. This sentiment of combined regulation is a major emerging trend, and is likely to play out within nation-states individually, as well as having a major network effect internationally, in 2018.