One of the hottest buzzwords in the global financial market right now is cryptocurrency—a digital asset, that is, an entity existing only in a digital world. A cryptocurrency is classified as a subset of digital currencies or virtual currencies, but its definition is not always clear or consistent.
On that note, Bitcoin first emerged in
2009 and is the forerunner among over
1,000 cryptocurrencies and numerous
other cryptocurrencies have followed suit
since the financial crisis. Bitcoin and similar currencies use a decentralized control
system called a blockchain, which is
totally different from conventional centralized electronic money or central banking systems. The decentralized control
technology of cryptocurrencies is their
most valuable asset, as it provides privacy, safety and credibility. Some even
argue that cryptocurrency technology that
Bitcoin demonstrated since 2009 is where
the financial world is headed because it
prevents central bank and government
manipulation, as well as hacking, from
taking place.
Despite all the novelty and merits of
cryptocurrencies, however, the financial
world is entirely perplexed and baffled by
the recent frenzy that was created across
world markets. Prices of cryptocurrencies
have risen at alarming rate. In Korea, the
price of Bitcoins surged from about USD
1,000 in Jan. 2, 2017 to more than USD
22,000 in Jan. 7, 2018. And market prices
of most cryptocurrencies here in Korea
have always been about 30 percent higher
than the global market prices.
The highly unusual price behaviors in
the cryptocurrency markets have caught
the attention of many potential investors,
but at the same time, most financial
authorities have begun looking deep into
the operation of cryptocurrency markets.
The financial authority’s primary concern
is of course about maintaining financial
stability, but more importantly, prevent-
ing money laundering, illegal trafficking, tax evasion or capital flight. China has
been especially sensitive to potential illegal financial transactions associated with
cryptocurrencies. As early as Sept. 2017,
the Chinese authority had banned ICO
(Initial Coin Offering) and shut down
local exchanges. As P2P transactions
continued even after local exchanges
were forced to close down, Chinese
authority finally blocked P2P transaction
on Jan. 16, 2018. So far, the Chinese government looks like it will refuse to budge
about cryptocurrency trades. Global cryptocurrency markets were devastated after
China’s bold action
Korean authorities also have been
deeply concerned about the potential danger of financial instability and possible
connection with illegal transactions associated with cryptocurrency transactions.
Unlike China, however, Korean bureaucrats hesitated whether restrictions and
regulation in cryptocurrency trade are
both legally possible and economically
feasible. On top of this hesitance, there
has been a strong argument that any regulation on cryptocurrency could be detrimental to financial innovation that might
be embedded in the blockchain technology of cryptocurrency.
Until China’s ban, the Korean government was lukewarm at most toward regulating cryptocurrency trades. Last
December, the Office of the Prime
Minister announced a plan requiring trading to take place using real names, but
that plan has yet to be implemented.
Cryptocurrency markets in Korea showed
no reaction until the middle of January
when high government officials began to
reveal very strong resentment against the
market. The Minister of Justice announced
in Jan. 11 his intention to shut down the
exchanges. A few days later the Minister
of Strategy and Finance reaffirmed the justice minister’s idea. Although the Blue
House denied its confirmation, the news
was enough to shock the market. In
Korea, the price of Bitcoin has fallen to
USD 14,000—a 6 percent drop in less than a week. It created havoc in cryptocurrency markets and some have written more than 200,000 petitions to the
Blue House asking not to shut down
trades.
Such a reaction is understandable but it
is not easy to understand the potential
risks that exploding virtual currency markets would bring about to financial businesses. First of all, the price behavior of
such currency has been too odd or abnormal to be regarded as natural investment
behavior. Another risk is potential evasion of tax levy or prudential legal
requirements. There is also strong possibility that illegal activities might be connected to cryptocurrency transactions.
That’s why governments like China,
Korea or the United States are regulating
volatile and potentially dangerous cryptocurrency trades. But not all countries
necessarily have to close down the cryptocurrency trade houses like China.
Depending upon the maturity of investors
and legal infrastructure, government regulations can take a different form.
By Professor Se Don Shin
Dean, Sookmyung Women’s University
seshin@sm.ac.kr
The above article does not necessarily reflect the views or position of KOTRA.