Brian Jeong remembers the frenzy that swept through South Korea this time last year.
From coffee shops to fast food joints across the sprawling capital city of Seoul, a new obsession emerged seemingly out of nowhere.
“Last winter,” the analyst at BlockWater Capital, a digital asset investment firm, recalled, “you would hear senior citizens, like ladies and gentlemen, eating fried chicken, talking about bitcoin.”
“And at all cafes, at every table,” added Erica Kang, a partner at the firm. “Suddenly, it was just like a hyped thing.”
And what hype it was.
Frustrated by limited investing opportunities in a stagnant economy, angered by hopeless politics, and driven by greed, millions of Koreans hopped aboard the cryptocurrency bandwagon as bitcoin took off on its extraordinary run in late 2017. The momentum was such that, by late December, according to one survey, three out of every 10 salaried workers in Korea had invested in cryptocurrencies.
Once a relative crypto backwater, Korea rapidly emerged as one of the world’s largest markets for bitcoin and ethereum, as investors tripped over each other for a piece of the action. At its peak, the “Kimchi premium”—or the extra that Koreans paid for cryptocurrencies versus global price benchmarks—swelled to 50%.
The party ended far more abruptly than it began, as the Korean government, belatedly, swooped in to tamp down on the unregulated speculative frenzy. Tumbling cryptocurrency prices further took the wind out of the market. The mania died quickly, painfully.
Yet, from the ashes of the crypto craze, a blockchain boom has emerged. There are already projects underway, backed by heavyweight local businesses, that could bring services built on blockchain platforms into the lives of almost every Korean. Beyond the private sector, government agencies are also embracing distributed ledgers, including a blockchain-based voting system.
Yet, from the ashes of the crypto craze, a blockchain boom has emerged. There are already projects underway, backed by heavyweight local businesses, that could bring services built on blockchain platforms into the lives of almost every Korean. Beyond the private sector, government agencies are also embracing distributed ledgers, including a blockchain-based voting system.
The messy politics, together with high youth unemployment and a sluggish economy, served as a catalyst to stoke interest in crypto. “Everyone was feeling betrayed… there was just a lack of trust for corporations and the government,” a Seoul-based lawyer explained, requesting anonymity. “They saw this cryptocurrency as more of a messiah. This is the only way out of this misery.”
The messy politics, together with high youth unemployment and a sluggish economy, served as a catalyst to stoke interest in crypto. “Everyone was feeling betrayed… there was just a lack of trust for corporations and the government,” a Seoul-based lawyer explained, requesting anonymity. “They saw this cryptocurrency as more of a messiah. This is the only way out of this misery.”
By December, the government’s stance became clearer. Korea’s ministry of justice considered banning bitcoin and other cryptocurrencies altogether. Later that month, the government announced a tightening of cryptocurrency regulations, putting a stop to anonymous trading accounts. The markets recoiled, and Koreans reacted by petitioning the authorities to go easy, such as this poetic plea:
Korean people can dream a happy dream that we’ve never been able to in South Korea, thanks to cryptocurrencies. I might be able to buy a house in a country where it’s very hard to buy a house. I might be able to live a life doing something I want to do. I might be able to take a breath.
The new year brought even more regulatory tightening, as KYC and anti-money laundering norms kicked in. Police and tax authorities bolstered their scrutiny of cryptocurrency exchanges, conducting raids to investigate alleged tax evasion, amid a spate of hackings. Korean banks that did business with exchanges also felt the heat.
The most effective damper, however, were the markets themselves, as prices went into a dramatic tailspin in 2018. Ordinary Koreans who had poured money into crypto looking to turn a quick profit were left scrambling.
“I think the government played a big role in killing this bubble,” said an advisor to the Korea Blockchain Association, an industry body, requesting anonymity. “They are actually happy with this outcome because they actually expected something worse, like people jumping off a bridge.”
The Financial Services Commission (FSC), the country’s main financial regulator, and the ministry of science declined interview requests. In an emailed statement, the FSC said:
Although the FSC introduced a real-name account policy for cryptocurrency trading and guidelines on anti-money laundering using cryptocurrencies, the measures are aimed at minimizing the side effects such as money laundering and tax evasion using cryptocurrencies, not intended for the FSC to directly regulate cryptocurrency exchanges like financial institutions.
The aftermath
Simon Kim studied computer science and engineering at the Pohang University of Science and Technology—the Korean equivalent of Caltech—before finding his feet as an angel investor and entrepreneur. In 2017, the 34-year-old convinced six friends, some of them fellow engineers and entrepreneurs, to pool some $700,000 of their money for backing blockchain projects.
This dissonance may have to do with the haphazard handling of crypto regulation during the boom. In late 2017 the government initially assigned the FSC to cool the markets and kill the kimchi premium, explained Park Jong-baek, a partner at Seoul’s BKL law firm. “But after that, they moved it to ministry of justice. And then, they moved it to the prime minister’s office,” Park added. “In the course of doing that there was no organized logic or policy.”
Individual lawmakers have shown some interest in bringing clarity to the issue, but none of their draft bills have made headway in parliament. The recent slide in cryptocurrency prices has also taken away a sense of urgency. This regulatory uncertainty is creating unease, especially around ICOs that some large blockchain projects are keen to undertake.
It’s difficult to say how things will develop from here. Now that the retail markets have cooled off, the Moon administration has much bigger headaches to deal with. The economy, unemployment, and the peace process with North Korea, to name just a few. But with big money and big names getting into blockchain, some expect that there will be clarity sooner than later.
“You know Kakao and Naver, they aren’t going in with blindfolds on,” the Seoul-based lawyer said, citing their connections with Korean officialdom. “They know exactly how things are going to shape up.”
The rest of us will have to wait and see.
