From Cryptocurrency Jungle to Institutionalized Test Bed: The Korean Blockchain Market
Korea: a cryptocurrency jungle for regulation and taxation
The blockchain specialists I meet often ask me about the factors driving the cryptocurrency boom in Korea. Korea ranks third, fourth globally in cryptocurrency trading volume, and makes up a significant part of the blockchain technology ecosystem. Major corporations like Samsung Electronics and SK are jumping into the industry alongside neophyte blockchain startups.
There are many technological factors in the Korean cryptocurrency boom, which I have talked about in various interviews. I have argued that Korea’s globally leading internet infrastructure starting from the 90s fostered the growth of early models for online gaming, social media, esports, and game item exchanges and that that has nurtured a strong national belief in digital assets and their value. This is, of course, integral to a successful internet of value ecosystem. We can also cite the political crisis in Korea in early 2017, and the unique conditions that the country faced during that time.
In early 2017, when cryptocurrency began to be widely recognized by the public, South Korea was going through a kind of interregnum after the impeachment of President Park Geun-hye. While several altcoins like Bitcoin and Ethereum began skyrocketing in price and governments around the world were quick to adopt regulations, Korea could not do the same. In late 2017, when the industry was rife with issues such as exchange hacking and scams, this lack of control was evident: too many individual investors were exposed to cryptocurrency, there were over a hundred cryptocurrency exchanges in Korea, and many Korean blockchain companies had issued tokens through overseas corporations.
With cryptocurrency already familiar to the public, and many corporations and developers putting their faith in blockchain as the next new industry, the Korean government is carefully crafting a soft landing for regulations. However, the lack of understanding of the industry and different positions between agencies has hindered the development of basic blueprints for tax policies, let alone specific guidelines. We can say, therefore, that the Korean government has one of the most vibrant markets for crypto asset-related businesses, but one that has, up to this point, yet to be regulated — a kind of cryptocurrency jungle.
To the Korean blockchain industry, with help from politicians and civil servants
Hashed has been putting in efforts to improve the condition of Korean cryptocurrency regulations with an education geared towards politicians and regulators. This August, we co-hosted ‘A Blockchain Q&A: the government, the businesses, the people’ with Korean think tank Yeosijae at Hashed Lounge. The event was attended by CEOs of Hashed, Terra, and ICON as well as influential politicians and civil servants such as chairman of the national policy committee Min Byung-doo, former deputy prime minister for economic affairs Lee Hun-jai, and former Busan vice-mayor Yoo Jae-soo.
Chairman Min of the national policy committee expressed his optimism about the future of the blockchain industry, remarking that “blockchain is closely linked to a cashless economic society, and if companies such as Facebook issue cryptocurrencies and allow it to be used on social media, this will be the future of key currency.”
“The public during the industrial revolution feared the loss of jobs, but it led to a more vibrant economy,” said former deputy prime minister of economic affairs Lee Hun-jai, expressing his anticipation for the future of blockchain. He added that “if we view the blockchain industry like the early days of the internet, and are wise in adapting to the technology, there will be a new market and new jobs.”
Busan’s former vice-mayor, who at the time was managing blockchain-related business in the recently announced special blockchain district, described his plans for the city: “We believe that ICOs have great potential as financing mechanisms for innovative companies, and the Busan blockchain special district will develop from a private blockchain support system to a broader sense, with cryptocurrency funds and exchanges.”
The event gathered much attention from the fact that it was the first round-table discussion in an industry setting instead of in congress, and overall was a good opportunity to explicate to Korean society the vision of the blockchain and cryptocurrency industries.
Amendment of Korean Law Granting Status to Virtual Asset Providers
A financial transaction report act that mandated all cryptocurrency exchanges operating in Korea to report to the government was passed on November 25th at Congress’ State Affairs Committee. This act is aimed at preventing laundering of criminal funds and financing terrorism, and requires financial institutions, including banks, to report to financial supervisory authorities whenever they detect a transaction that could potentially be illegal. Cryptocurrency exchanges were added to the financial institutions subject to this act, which classified cryptocurrency as virtual assets, and cryptocurrency exchanges as virtual asset providers.
The act went through an extended period of contention at the state affairs committee because of concerns that it could shut down existing cryptocurrency exchanges with excessive regulations. For a virtual asset provider to be registered by the Korean government, it needs the following requirements:
- Real-name teller services (real-name virtual accounts)
- Information Security Management(ISMS) authentication
In order to obtain real name teller services, banks must issue virtual accounts to exchanges, which many banks are refusing Korean cryptocurrency exchanges without any legal grounds to do so. Since the new act includes an account issuance condition, we expect more small and medium-sized exchanges, as well as exchanges abroad, to be able to connect their accounts with Korean banks. The act also gives a 6-month grace period to virtual asset providers who have yet to secure ISMS authentication, allowing more space for the industry to get used to the new regulations.
On the whole, this new act seems to be an industry-friendly one in the sense that it eschews inflexible limitations and regulations on virtual asset providers for a more acclimation-focused approach.
Korea’s role as an institutionalized testbed
Light has always been an important question for scientists. Physicists have been arguing for decades about whether light is a particle or a wave. The two seemed to be mutually exclusive — while a particle is a very small component of any object, a wave refers to a movement within a space. Only after Einstein’s work on the photoelectric effect was scientists forced to accept that light could have the properties of both particles and waves. Similarly, I consider experimentation and extensive conversations critical to developing a multifaceted understanding of this new asset class.
Korea has one of the most active crypto asset participating publics in the world. With platforms with messenger-linked blockchain protocol such as Kakao’s Klaytn and LINE’s LINK, which even have their own tokens, the daily lives of tens of millions of users can be integrated into the crypto world. While daily active wallets on Ethereum and EOS are just shy of 100,000, we anticipate Klaytn will be able to bring in 50 million active users, and LINK 180 million. Terra, the biggest stablecoin project in Asia, is expanding its activities as the major payment method of e-commerce in Korea and Southeast Asia. Major startups with millions of users are tokenizing their businesses (it is hard to find projects of this scale outside Korea; Libra is facing a great deal of backlash in its planning stages), and many projects in the Korean market are trying to create virtual worlds through blockchain games.
The factors I have mentioned above have transformed the Korean cryptocurrency jungle into an institutionalized testbed, something that the global blockchain community has duly noted. Hashed will continue to support various activities to allow for the reasonable and progressive development of crypto asset regulations in Korea, while acting as a bridge to the global blockchain community with its varied projects and experience.
