Seoul’s plan to ban cryptocurrency trading sends market plunging

SEOUL - The South Korean government on Thursday (Jan 11) said it plans to ban cryptocurrency trading, sending bitcoin prices plummeting and throwing the virtual coin market into turmoil as the nation’s police and tax authorities raided local exchanges on alleged tax evasion.

The clampdown in South Korea, a crucial source of global demand for cryptocurrency, came as policymaker around the world struggled to regulate an asset whose value has skyrocketed over the last year.

Justice minister Park Sang-ki said the government is preparing a bill to ban trading of the virtual currency on domestic exchanges.

“There are great concerns regarding virtual currencies and justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges,” said Mr Park at a press conference, according to the ministry’s press office.

The minister's comments were later downplayed by a spokesman for President Moon Jae-in, who said the proposal is one among several and that nothing has been finalised.

The South Korean government disclosed a similar proposal on Dec 28, though at the time it also included other options such as allowing trading to continue under tighter regulation.

A press official said the latest proposed ban on cryptocurrency trading was announced after “enough discussion” with other government agencies including the nation’s finance ministry and financial regulators.

Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.

Seoul’s tough stance triggered a selloff of the cyrptocurrency on both local and offshore exchanges.

The local price of bitcoin plunged as much as 21 per cent in midday trade to 18.3 million won (S$22,698.24) after the minister’s comments. It still trades at around a 30 per cent premium compared to other countries.

Bitcoin was down more than 10 per cent on the Luxembourg-based Bitstamp at US$13,199 (S$17,603), after earlier dropping as low as US$13,120, its weakest since Jan. 2.

South Korea’s cryptocurrency-related shares were also hammered. Vidente and Omnitel, which are stakeholders of Bithumb, skidded by the daily trading limit of 30 per cent each.

Park Nok-sun, a cryptocurrency analyst at NH Investment & Securities, said the herd behaviour in South Korea’s virtual coin market has raised concerns.

Indeed, bitcoin’s 1,500 per cent surge last year has stoked huge demand for cryptocurency in South Korea, drawing college students to housewives and sparking worries of a gambling addiction.

“Virtual coins trade at a hefty premium in South Korea, and that is herd behaviour showing how strong demand is here,” Mr Park said. “Some officials are pushing for stronger and stronger regulations because they only see more (investors) jumping in, not out.”

Korea has emerged as something of a ground zero for the speculative frenzy, with the nation’s prime minister warning recently that the boom might corrupt the nation’s youth. The government said in December that it would be conducting on-site investigations of the nation’s cryptocurrency exchanges.

“For the last few months the Korean government has been making it very clear they want to bring this speculative activity under control,” said Thomas Glucksmann, Hong Kong-based head of APAC business development with cryptocurrency exchange Gatecoin Ltd. “This isn’t really too much of a surprise.”

There are more than a dozen cryptocurrency exchanges in South Korea, according to Korea Blockchain Industry Association.

The proliferation of the virtual currency and the accompanying trading frenzy have raised eyebrows among regulators globally, though many central banks have refrained from supervising cryptocurrencies themselves.

The news on South Korea’s proposed ban came as authorities tightened their grip on some of the cryptocurrency exchanges.

But even if Korean lawmakers push forward with an exchange ban, local investors are likely to keep investing in cryptocurrencies through over-the-counter platforms and overseas venues, said Mike Kayamori, head of Tokyo-based exchange Quoine, which counts Koreans among its customers.

“There are always underground exchanges and OTC,” he said. “They’ll probably convert their money into bitcoin there, and then start trading offshore.”

The nation’s largest cryptocurrency exchanges like Coinone were raided by police and tax agencies this week for alleged tax evasion. The raids follow moves by the finance ministry to identify ways to tax the market that has become as big as the nation’s small-cap Kosdaq index in terms of daily trading volume.

Some investors appeared to have taken preemptive action.

“I have already cashed most of mine (virtual coins) as I was aware that something was coming up in a couple of days,” said Eoh Kyung-hoon, a 23-year old investor.

Bitcoin sank on Monday after website CoinMarketCap removed prices from South Korean exchanges, because coins were trading at a premium of about 30 per cent in Asia’s fourth largest economy. That created confusion and triggered a broad selloff among investors.

An official at Coinone told Reuters that a few officials from the National Tax Service raided the company’s office this week.

“Local police also have been investigating our company since last year, they think what we do is gambling,” the official, who spoke on condition of anonymity, said and added that Coinone was cooperating with the investigation.

Police have been investigating Coinone’s margin-trading service since last year, according to an official who asked not to be named citing policy. He added that no other large exchanges are under police investigation.

One of Korea’s biggest digital currency venues, Bithumb, said on Thursday that it met briefly with tax officials this week. The exchange disputed a Reuters report that its offices had been raided by tax and police agents.

The nation’s tax office and police declined to confirm whether they raided the local exchanges.

South Korean financial authorities had previously said they are inspecting six local banks that offer virtual currency accounts to institutions, amid concerns the increasing use of such assets could lead to a surge in crime. AGENCIES