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With cryptocurrency demand skyrocketing in South Korea, the government is looking to control digital currencies, putting strain on the local sector.
In South Korea, one in three citizens either own cryptocurrencies or get paid in them. One-tenth of its population trades digital assets, and its youth unemployment rate hovers above 10%. It’s a competitive job market in the East-Asian nation, where high expenses enforce hierarchical social structures, and financial stability can seem like a pipe dream.
South Korea is very advanced in terms of technology and creativity. After news of cryptocurrencies’ presence became widely known in the world, there has been a lot of buzz around them.
Because of its openness to technological innovation, the country could opt to limit — rather than prohibit — blockchain-based tokens. However, since gambling is illegal under South Korean rule, and many schemes depend so much on speculation, some companies will almost certainly face increased scrutiny.
On the surface, South Korea has one of the world’s strongest economies — being the fourth-largest in Asia and 10th-largest globally — with an extraordinary human development index and only moderate levels of income inequality. However, beneath the surface, a financial revolution is seemingly brewing, and blockchain is at the heart of it.
The South Korean stock market is dominated by four family-owned conglomerates known as “chaebols,” which many consider to be deeply corrupt and politically dominant. Recently, estimated volumes on top Korean cryptocurrency exchanges exceeded the country’s stock market, which may indicate that people’s intentions are becoming apparent.
South Korea, as a nation, is a significant contributor to global cryptocurrency volumes. Digital assets are ingrained in the society, allowing many young people to make ends meet considering Korea’s growing youth unemployment rates. South Korea was prepared for digital assets before cryptocurrencies even existed, having long followed the concept of micropayments from its obsession with video games.
The country still has the fastest internet speeds in the world, and its inhabitants are familiar with mobile payment services as a result of the country’s thriving telecommunications industry. The nation launched its own cryptocurrency, the S-coin, in 2019 as part of a government initiative.
However, the government passed legislation later in March 2020 to clamp down on blockchain investments, and the citizens of South Korea, especially its youth, were not happy. Mark Lee, founder of South Korean blockchain marketing agency Eightfive, told Cointelegraph: “South Korea is quite conservative when it comes to speculative products. The high youth unemployment numbers are often seen as one reason many young people are drawn to Bitcoin and other cryptocurrencies.”
According to reports from local news outlets, the South Korean youth are leaving their jobs to explore day-trading cryptocurrencies. Most of the Korean nationals view digital assets as a means of wealth generation that’s far more rapid than their day jobs could ever provide. It’s come to the point where some companies have started threatening to block crypto exchanges on their networks, preventing their employees from checking in on price fluctuations during the day.
“Different concerns exist in different jurisdictions,” said Ben Caselin, head of research and strategy at South Korean cryptocurrency exchange AAX, adding: “In South Korea, perhaps more than anywhere else, there is a very real concern over capital flows, especially in relation to North Korea. We can, therefore, expect a continued tightening of regulations in South Korea.”
In March, to ensure compliance with Anti-Money Laundering regulations, South Korea’s top financial regulator, the Financial Services Commission, or FSC, ordered that cryptocurrency exchanges needed to have a “Virtual Asset Service Provider,” or VASP, license to operate.
They also informed exchanges that they had until September to comply, but at a National Assembly policy committee meeting on April 22, FSC chairman Eun Sung-soo said that the FSC had not yet received any VASP applications. Sung-soo also reported that if the present trend persists, more than 200 exchanges will be closed by the end of the year.
Daybit, a South Korean exchange, announced last month that it will cease operations due to difficulty in seeking a banking partner in the face of new rules, but even larger players are facing similar difficulties. OKEx closed its Korean website earlier this year, citing problems with the latest Anti-Money Laundering laws, and Binance Korea shut down services in December — just eight months after its launch.
National issues, global consequences
The “big four” exchanges in the country — Bithumb, Coinone, Upbit and Korbit — registered nearly 2.5 million new users in Q1 of 2021 alone, with 64% of them between the ages of 20 and 30. In fact, traders in their 30s out-spent every other demographic, producing over $398 million in trade volume over the quarter.
“Surprisingly, Bitcoin is relatively not as popular in Korea,” said Min Kim, founder of the South Korean enterprise blockchain solutions platform Icon. “For example, BTC ranks #10 in trading volume on Upbit, Korea’s largest exchange,” he said, adding: “Koreans are investing heavily into altcoins today because they look at crypto as a lottery ticket.”
The nation’s youth is highly reliant on these exchanges, and closing them down will be devastating not just to South Korean young investors, but also to the global cryptocurrency sector. There are also internal social class tensions in the region, which makes cryptocurrency extremely appealing to younger generations.
“South Korea is quite conservative when it comes to speculative products. The high youth unemployment numbers are often seen as one reason many young people are drawn to Bitcoin and other cryptocurrencies,” said Lee, continuing: “Political uncertainty is also a concern, and because Bitcoin is not attached to any state, it’s appealing to man.”
The FSC chairman has recently instructed all FSC officials to reveal their cryptocurrency assets by May 7, but the punishments for failing to do so are allegedly not too serious.
According to news, only the top four cryptocurrency exchanges are expected to sign up with and collect VASP licences before the deadline. Though this may not completely eliminate cryptocurrency trading in South Korea, it will lead to a convergence of crypto-related services within the nation. Caselin continued:
“In South Korea, perhaps more than anywhere else, there is a very real concern over capital flows, especially in relation to North Korea.”
According to Kijun Seo, CEO of Planetarium, a decentralised video game production studio, “the government is still trying to figure out how to oversee investment and speculative activities, with new tax and registration laws going into effect this year.”
The nation’s finance ministry accelerated the process in February by imposing a new 20% levy on cryptocurrency gains exceeding $2,230, which is now scheduled to become law in January 2022.
Sung-soo also recently came under fire for his negative remarks about cryptocurrencies, spurring over 300,000 outraged citizens to sign a petition calling for his resignation. Conflict between the people and the government is unlikely to solve any problems, but without sound regulation, it doesn’t make sense for any government to open its arms to cryptocurrencies.
Regulators are legitimately concerned about its pseudonymous identity, but given the country’s enthusiasm for blockchain, securing a stable cryptocurrency industry in South Korea isn’t just a national problem — it’s a global one.