Why Is South Korea Spooking the Global Bitcoin Market?
By SU-HYUN LEE and RAYMOND ZHONG
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SEOUL, South Korea — The world of Bitcoin — rarely free of wild ups and downs of late — has been rattled this week by word that South Korea is preparing a ban on trading in virtual currencies.
The question is how real that threat might be.
The government has expressed alarm. Officials, including the prime minister, have voiced concerns about an irrational frenzy. Raids by South Korean tax officials on digital currency exchanges this week have added to unease among investors.
“I am so nervous,” said Kim Su-jin, a 50-year-old investor in Bitcoin and other virtual currencies who works as a bookkeeper at a women’s clothing store in Seoul. “My coins could become trash if the government closes the exchanges.”
But South Korea does not appear to be done with cryptocurrencies quite yet. Several political leaders have already aired their opposition to a ban on Bitcoin trades, indicating that the public enthusiasm for virtual currencies just might be strong enough to shield them from further government intervention.
What might South Korea do?
The country’s justice minister, Park Sang-ki, said this week that his ministry was drawing up a bill that would include the complete shutdown of virtual currency exchanges, adding that trading in the tokens “has started to resemble gambling and speculation.”
The most popular Bitcoin exchanges in South Korea process hundreds of millions of dollars’ worth of transactions every day. Trades using the Korean won account for around five percent of the volume of Bitcoin trades globally.
Will the government pursue a ban?
For now, the authorities do not appear to be of one mind on the subject. After Mr. Park’s comments on Thursday, a spokesman for P resident Moon Jae-in clarified that the Justice Ministry’s plan was not final, according to the Yonhap news agency.
Then, on Friday, Kim Dong-yeon, the finance minister, emphasized that other ministries would be expected to confer on the Justice Ministry’s proposal, Yonhap reported.
Will lawmakers support it?
At the very least, a ban would not be passed quickly: Securing a majority of votes in the National Assembly could take months.
More to the point, several lawmakers from major parties signaled this week that they would not support a crackdown. Park Young-sun, a member of the governing party who has no relation to the justice minister, wrote on her Facebook page that closing the exchanges would be like “setting fire to a straw-roofed house to catch a bedbug.” Ha Tae-kyung, a legislator with the opposition Bareun Party, wrote on Facebook that criminalizing virtual currencies would fly in the face of the administration’s claims to support new technologies.
South Korean citizens have also voiced their opposition to a potential clampdown by signing petitions with the president’s office. The most popular of these has garnered more than 120,000 signatures.
“The power of the individual investor is very huge in South Korea,” said Simon Seojoon Kim, chief executive of Hashed, a fund in Seoul that invests in virtual currency projects.
What prompted the investigations?
The National Tax Service in South Korea declined to comment on why its representatives visited two major virtual currency exchanges, Bithumb and Coinone, this week. But Shin Won-hee, head of operations at Coinone, said that the tax authorities wanted to check that the company had paid proper corporate tax.
Bithumb told local news outlets that it was cooperating with the investigation.
Separately, the police in Gyeonggi Province, which surrounds Seoul, have been investigating whether Coinone is operating “a gambling site.” The company had previously allowed investors to buy and sell virtual currencies on margin — that is, to place bets using borrowed money. But Mr. Shin said that Coinone decided in November to stop allowing margin trading as government officials began expressing concerns about market overheating.
Why is Bitcoin is more expensive in South Korea?
Mr. Park, the justice minister, said this week that the depths of South Korean investors’ irrationality was reflected in the high premium — around 30 percent on Friday — that they pay on Bitcoin exchanges in South Korea over those elsewhere.
“That media have used the phrase ‘kimchi premium’ reflects foreigners’ assessment that the Korean market is abnormal,” Mr. Park said.
Experts said that South Korean prices were also higher because the exchanges there do not allow trading by foreigners. That prevents overseas investors from selling Bitcoin in South Korea to profit from — and thereby help narrow — the price gap.
South Korea’s isolation from the global market leads investors at home to seek better prices elsewhere. “We are seeing Koreans taking loads of cash to buy Bitcoin in Indonesia and other countries in Southeast Asia where Bitcoin is cheaper,” said Hong Ki-hoon, professor of economics at Hongik University in Seoul.
What do investors think?
With so many conflicting signals from the government, “I don’t think any of us think that these strong measures will actually be implemented,” said Hyon Hae-in, a 35-year-old Bitcoin investor.
“Longtime investors see times like these as opportunities to trade,” she said.
Su-hyun Lee reported from Seoul, South Korea, and Raymond Zhong from Hong Kong.
Follow Raymond Zhong on Twitter: @zhonggg.