South Korean regulators need to learn to love cryptocurrencies
Underlying technologies will fuel innovation and boost economic competitiveness
South Korea has emerged as a key driver in the global trading of bitcoin, Ethereum and other cryptocurrencies even though local investors often pay a premium of up to 40% over world prices when buying them.
But Seoul has recently introduced measures to dampen speculative cryptocurrency trading and signaled possible further moves, including a possible China-style ban on cryptocurrency exchanges, with the justice minister referring to trading as a form of gambling. These regulatory actions, threatening South Korea's status as the world's third-largest cryptocurrency market, have fed a steep drop in the global prices of bitcoin and its peers.
The South Korean approach is short-sighted. It can only temporarily curb speculative behavior. The reality is that the technologies underlying cryptocurrencies are gradually becoming part of consumers' daily life.
Since South Korea's top exporters, including Samsung Electronics and LG Electronics, must meet the demands of global customers for high-tech products, the government will face increasing pressure in the future to reverse its tough regulatory stance. Established South Korean financial services companies are already struggling to remain at the forefront of technological relevance, particularly in financial technologies, as they face disruption from savvy upstarts.
It is rare for financial regulators to keep pace with innovation. This is especially the case in South Korea with its conservative regulatory regime. Restrictions on cryptocurrency transactions can be effective only in the short-term since ways to circumvent the rules will inevitably emerge.
South Korean regulators and lawmakers could introduce more effective policies to curb speculative behavior if they better understood the development of financial technologies and the social context that has spurred the fierce demand for cryptocurrencies in the country.
One factor is that South Koreans' domestic investment options are mainly limited to stocks and real estate. With access to real estate opportunities constrained by requirements for large down payments and the stock market generating lackluster returns in most recent years, investors have been restless for alternatives.
Cryptocurrencies have offered the prospect of high returns not linked to the local economy, even though currency and payment controls meant South Korean sellers could command a premium from domestic buyers. Cryptocurrency trading also tapped into an underlying psychology of hope against the background of South Korea's competitive society. The appeal of potential outsize returns from a small capital stake has been particularly strong among those in their 20s and 30s who are facing rising debt, prohibitively expensive housing and trouble finding good jobs in going up against those with top academic or social credentials.
As the value of major cryptocurrencies rose and more South Koreans purchased them, this created a dilemma for regulators. Signs of a speculative bubble were emerging, with increasing reports of people using borrowings to buy cryptocurrencies and indications others were selling local stocks to fund their purchases.
If regulators did nothing and there was a severe correction in cryptocurrency prices, there could have been negative political, economic and social impacts. The government would then be blamed by the public and opposition parties for not having acted with preventive measures. The government could also have faced demands to help bail out financial institutions and investors who suffered cryptocurrency losses. Another public policy consideration has been whether growing investment in cryptocurrencies is challenging traditional economic stakeholders, such as the National Pension Service, the largest owner of South Korean equities.
Though interventions by South Korean regulators' ironically have now helped cause a major correction in cryptocurrencies globally, this has likely reinforced the authorities' confidence that acting early may have staved off even larger problems later. However, since the blockchain technologies that underpin cryptocurrencies will not disappear, it is still vital that South Korea considers an effective regulatory framework to remain technologically relevant. If done right, South Korea can become a leader in this sector and help shape future market directions.
Singapore might be a possible model for study. Its cautious but open approach to digital currencies has supported the city-state's emergence as an entrepreneurial hub for Southeast Asia, particularly for fintech. As far back as 2013, the Monetary Authority of Singapore indicated that businesses could freely choose to accept payment in cryptocurrencies. The government followed that up with tax guidelines regarding crypto transactions. The authority also issued a number of warnings to the public that investing in cryptocurrencies carries high speculative risk.
By implementing this kind of open approach, South Korea could foster a more vibrant innovative ecosystem that also embeds necessary elements of consumer protection. Regulators should bear in mind the need to adapt as underlying technologies evolves and to engage in meaningful dialogue with stakeholders. A comprehensive regulatory framework, that covers issues including taxation and anti-money laundering controls, can help to address many of the regulatory uncertainties that shroud cryptocurrencies, contributing to their price volatility.
South Korea has suddenly found itself at the heart of the global cryptocurrency debate. Implementing thoughtful regulations instead of resorting to reactive measures to dampen speculation would help position the country as a fintech leader. This would also contribute to promoting South Korea's economic and innovative competitiveness as it seeks to reduce its historical dependence on large conglomerates.
David S. Lee is a senior lecturer at the University of Hong Kong Faculty of Business & Economics.