Crypto craze in Korea

By John Burton

Korea is not normally known to be a big player in international financial markets. But there is one major exception: its trading in cryptocurrencies. Korea’s importance as the world’s third largest cryptocurrency market has been highlighted in recent weeks when a government threat to ban local cryptocurrency exchanges triggered a global crash in the prices of bitcoin and other digital currencies.

But the cryptocurrency saga also provides insights into the sharp divisions emerging in Korea about the role of technology in society and response of regulators to rapid change.

It may not be surprising that Korea along with its Asian neighbors China and Japan has been wrestling with issues raised by cryptocurrencies since these countries are at the forefront of global digital trends.

Authoritarian China has decided to banish cryptocurrency trading, while liberal Japan has embraced it. Korea’s response, in contrast, has been muddled.

It is easy to see why the crypto craze has taken off in Korea. It reflects the country’s impressive skills in navigating the digital economy, based on fast internet networks, the proliferation of smartphones and a tech-savvy population.

But it also represents a popular rebellion against a stodgy political and financial establishment. The “get rich appeal” of bitcoin trading reflects growing frustration about the economic challenges facing the average Korean.

Normal investment options in Korea are limited to equities and property. Until last year, the stock market was sluggish and did not offer attractive returns. Meanwhile, property prices have climbed to unaffordable heights for many people, particularly those just starting their careers.

As a result, cryptocurrencies appeared to offer a short-cut escape route from these and other problems. The allure of investing a small amount of capital and getting a potentially outsized return seemed to offer an instant solution to such problems as high youth unemployment, rising household debt and the prohibitive cost of housing.

Investors seeking richer returns overseas have also been hampered by capital controls, which officials have used to manipulate the value of the won to boost exports. Cryptocurrencies appear to offer a way around these controls.

The government has adopted a moralistic tone in condemning speculative cryptocurrency trading, with the justice minister likening it to “gambling” and the prime minister warning it could facilitate drug dealing and other crimes.

These comments reflected a deeper fear of officials that they are in danger of losing oversight over a financial system that they have fought to keep control over for the last 60 years.

The rise of cryptocurrencies does pose a threat to the current financial system. Officials worry that the outflow of cash from the local stock market to virtual currency would weaken the performance of equities that account for most of the asset holdings of pension funds and the chaebol. There have been concerns that some investors were borrowing heavily to finance their cryptocurrency purchases.

But a crackdown poses a dilemma. Korea also wants to be seen as keeping abreast of digital advances, including the use of blockchain technology that underpins the cryptocurrency sector.

There is indeed something irrational in Korean investors paying up to 40 percent more for bitcoins than what they fetch on overseas markets in what has become known as the “kimchi premium.” But their fervor reflects a desire to break out of the constraints of a conservative financial system.

It is one reason why the recent suggestion of a virtual currency trading ban led to more than 200,000 people signing a petition protesting the proposed measure. Such government meddling may help explain the recent fall in public support for the Moon Jae-in government, particularly among those in their 20s and 30s who are Korea’s biggest bitcoin investors but who also form the president’s political base.

The best course for the government would be to accept cryptocurrency trading under a fair regulatory system. It is already making steps in that direction by requiring registering trading accounts under investors’ real names to be able to collect taxes on capital gains. But it should recognize virtual currencies as a valid means of payment and encourage the growth of licensed exchanges. At the same time, cryptocurrency investors should be warned that they should not expect the government to bail them out for any trading losses.

Such a compromise regulatory framework would likely result in more people investing in digital currencies while enabling Korea to become a leader in the global fintech revolution. It could also help the Korean economy to become more efficient and competitive by helping reduce the protectionist barriers of capital controls. The government must recognize that the cryptocurrency genie is already out of the bottle and it must adjust to new digital trends.

John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times,