South Korea's ICO Ban: A Reaction to "Serious Concerns" Over Cryptocurrency Investment Practices

The South Korean Financial Services Commission (FSC) has announced it will ban all forms of initial coin offerings (ICOs). After a meeting to discuss virtual currency control, the vice-chairman of financial affairs, Kim Yong-bum, made this comment as part of an official statement:

“We expressed a serious concern that the recent inflow of funds into the nonproductive speculative direction is showing up. As a result, we believe that additional measures are inevitable in order to switch to productive investment.”

The statement concludes by saying:

“All forms of ICO prohibition including securities issuance [and] monetary lending and coin margins are prohibited, blocking all business related business alliances.”

Korean blockchain expert and entrepreneur Ash Han told Bitcoin Magazine that “the FSC is concerned about ignorant investors becoming victimized by scammers using crypto.” Specifically, Han is referring to multi-level marketing or network marketing, an infamous way to raise money using existing distributors to recruit new distributors. This type of business strategy is often fraught with pyramid schemes in which raising money from new recruits buying in is the primary focus of the business instead of actual product development and sales.

Because the FSC has judged that virtual currencies such as bitcoin and ether are electronic representations of value and not financial products such as securities, the government has chosen to indirectly regulate virtual currencies through banks.

In addition to the FSC, several government organizations including the Korean Fair Trade Commission (KFTC), the National Tax Service (Korean IRS) and the police have formed a joint inspection system that will examine the current conditions of virtual currency exchanges through on-site inspections.

The FSC will examine the customer information leakages caused by hacking, strengthen penalties for similar behavior to prevent money laundering, and open a joint inspections system with several other government entities to examine the current conditions of digital currency traders and exchanges. The joint inspection system will also examine the regulatory and taxation trends of other countries and international organizations to form consensus on the character of virtual currency trade and taxation.

Until December, virtual currencies such as bitcoin and ether will be traded on an exchange only if a bank has confirmed the authorization of an account.  

“We will begin the transaction by checking the identity of the bank account and monitoring the flow of funds,” stated an official from the Financial Services Commission. According to Han, employing banks to keep track of all new accounts opened on exchanges will permit the FSC’s further investigation of violations regarding Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols. The only change for virtual currency exchange customers is that now these customers need to be able to prove that the bank accounts they have connected to an exchange belong to them.

While these new regulations could be efforts to correct South Korea’s frenzied ICO market, Han points out that if the South Korean authorities tightened control over virtual currencies much like China, they could “put a huge tax on crypto-related activities.”

Jay Kim, a.k.a The Crypto Lark, a Korean digital currency YouTube host, says the country’s ICO ban will not affect individual investors who participate in foreign ICOs. “In Korea, people actively investing in ICOs will not be affected. The government is concerned with scams. I think it’s a temporary measure until there are some regulations in place for ICOs.”

Scams and Bad Actors

This news comes as no surprise given an overall global move to regulate ICOs in some way. China has banned the issuance of virtual currencies as illegal public funding. In July, the U.S. Securities and Exchange Commission issued a warning that token sales would be regulated as securities and thus would have to comply with reporting and consumer protection requirements. On August 1, the Monetary Authority of Singapore (MAS) clarified that the issue of digital tokens would be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act.

Also, the South Korean digital currency exchanges have been consistently targeted by hackers over the last several months. According to a report by security firm FireEye, North Korea has been targeting digital currency exchanges since April 2017.

Since May 2017, North Korean actors have targeted at least three South Korean digital exchanges with the intent of stealing funds. This type of attack has been predominantly targeted at the “personal email accounts of South Korean employees of digital exchanges using a tax-themed lure to deploy malware.”

On July 5 2017 Bithumb was victim to a major hack. Bithumb remains South Korea’s largest digital currency exchange, the world’s second-largest Ethereum exchange by daily volume. At the time of the hack, 13.5 percent of the the total ether market was going through Bithumb’s exchange. Attacks such as this one would certainly have attracted scrutiny from Korea’s Internet and Security Agency.

Growth and Opportunity

This latest blow to South Korea’s cryptocurrency community comes at a time of recent growth and opportunity, despite the persistent scams and hacks of bad actors. Since China’s ICO ban in early September, South Korea has quickly been overtaking China in daily trading volume of digital currencies.

The country’s connection to the internet and technology in general cannot be underestimated. According to a 2015 study by content delivery network Akamai, South Korea had the fastest internet speed in the world based on the unique IP count, and its largest export company, Samsung Electronics, made a profit of $16.5 billion USD in 2016.

South Korea’s third-largest exchange, Coinone, recently opened “the world’s first blockchain 4D zone,” a brick-and-mortar exchange complete with a bitcoin ATM, a large display with real-time market information and a face-to-face consultation service.

The South Korean fintech firm Dunamu has announced the launch of a new crypto-trading platform through a partnership with the U.S.-based exchange Bittrex. The platform, called Upbit, will be released in beta in October. It will support over 110 different digital currencies including bitcoin, litecoin, ripple and ether.

In terms of popularity, the digital currency community in Seoul alone is enormous with 16 registered cryptocurrency Meetups, the largest of which is the Seoul Ethereum Meetup with approximately 3,550 members. In the past year the government has even taken part in the digital currency industry by auctioning off confiscated bitcoin.

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