Why is South Korea reversing its stance on cryptocurrencies?

February 23, 2018 10:01
Combined daily turnover of virtual currency trading platforms in South Korea exceeded US$20 billion last year, bigger than that of the nation’s stock market. Photo: Bloomberg

Less than a month ago, South Korea's Justice Minister Park Sang-ki said his ministry was preparing a bill to ban cryptocurrency trading platforms after “extensive discussion” with relevant government agencies.

Finance Minister Kim Dong-yeon and Finance Supervisory Service chief Choe Heung-sik weighed in, describing virtual currency trading as “huge speculation” and “a bubble doomed to burst”. Both officials supported a proposal to shut down all cryptocurrency trading platforms.

South Korea became the world’s number one cryptocurrency market last year. Combined daily turnover of virtual currency trading platforms in the country exceeded US$20 billion, bigger than that of the nation’s stock market.

Local authorities face great pressure amid wild moves in cryptocurrency trading. They are worried that digital assets may crash, affecting a large number of citizens. If that happens, the growth of the real economy would be derailed and financial turmoil would ensue.

But soon after issuing their hawkish remarks, the officials softened their tone. They said nothing has been finalized yet, and the proposed clampdown, which is but one of the many options, may only target illegal sites.

Choe's about-face is even more dramatic. He said earlier this week the authorities would like to foster the healthy development of cryptocurrency trading.

“The whole world is now framing the outline [for cryptocurrency] and therefore [the government] should rather work more on normalization than increasing regulation,” Choe told reporters.

Why the abrupt change in attitude?

I believe it might have something to do with Forbes’ report on Chinese cryptocurrency billionaire Changpeng Zhao, known as CZ in the cyber world.

Zhao amassed a personal wealth of US$2 billion in a matter of months after creating a cryptocurrency trading platform based in Shanghai while targeting overseas customers.

Sensing that the frenzy over cryptocurrency is here to stay, the South Korean government probably realized that instead of fighting the trend, it would be better to turn it into a profitable but regulated industry.

Much like the way countries like Malaysia, Singapore and Japan regulate the casino business, South Korea might want to become a regional trading hub for cryptocurrencies, catering for foreign speculators while introducing more rules to restrict the trading activities of local residents.

This article appeared in the Hong Kong Economic Journal on Feb 22

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist