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Crypto in South Korea: A History & What’s Next
South Korea’s population of 51 million people makes it the 27th most populous country in the world. The country represents only 0.6% of the world’s population. Nevertheless, when it comes to economics and technology, Korea wields outsized power in the world as a producer and early adopter of new technologies. Nowhere is this outsized role more evident than in cryptocurrency.
South Korea, despite its small size, is one of the leading nations in terms of cryptocurrency transactions and adoption. Investing in, trading, and using cryptocurrency is very common amongst Koreans. In 2017, the country was a global leader in the cryptocurrency market, responsible for more trading per capita than any other country in the world. However, over the past year, shifting government attitudes have led to uncertainty around Korea’s crypto future.
In this article, we’ll look at the history of cryptocurrency in Korea to gain greater insight into cryptocurrency adoption worldwide, especially in early adopter countries. From there, we’ll examine why the Korean populace pays more for their crypto than others around the world, and we’ll see what changing regulations mean for Korea’s role as an early crypto adopter. Understanding South Korea’s role in the cryptocurrency landscape can serve as foreshadowing for how other countries might respond as crypto adoption grows.
As a nation, South Korea has gained a reputation for early adoption of new technologies. Korea has the fastest internet in the world, and nearly every Korean household has access to the internet. But the trend isn’t recent. Korea has a long-standing history of early adoption.
Since the 1990s, Koreans have been ahead of the curve. Koreans launched some of the earliest social networks. Started in 1999, CyWorld was popular in Korea four years before MySpace’s founding and long before Facebook. The country also led the world in adoption of Voice over Internet Protocol (VoIP) technology for making phone calls online with Dialpad Communications founded in 1999.
Korea also led the world in the mobile revolution, becoming early adopters of cell phones, camera phones, and smartphones. In fact, Korea is leading the world in mobile-first adoption, meaning the default assumption is that a Korean user is using a cell phone, rather than a computer, to access a web page or internet service.
Most importantly in the context of cryptocurrency, however, the Korean public has long been exposed to the concepts of micropayments and digital tokens. 1996 saw the first online roleplaying games in Korea from video game studio Nexon. Those games included microtransactions that made the company millions in profit. For many titles from Nexon, in-game credits took on their own value. You could trade digital credits for real currency in some marketplaces, and Koreans grew up understanding how digital assets could be transferred.
2. Why Is Crypto So Big in Korea?
As Bitcoin and the following blockchain movement arrived, Koreans were uniquely prepared to embrace digital currency. After all, they’ve been using digital tokens and making online transactions for decades. Trading Bitcoin and other currencies isn’t so different. This familiarity with digital payment is a major factor underpinning crypto’s success in Korea.
Additionally, cryptocurrency came along at an opportune time in the Korean economy. On paper, the Korean economy is strong, with a rising GDP. However, economic growth and population growth haven’t coincided as favorably in Korea as they did in other Asian countries like Japan in the 1990s or Singapore in the 2000s. Instead, GDP per capita has been a gradual climb and opportunities for younger Koreans have stagnated.
Youth unemployment in Korea in 2017 was 9.8%. As young people struggled to find jobs, many were excited to turn to cryptocurrency as a way to make money. And they did make money. Over the period from 2014 to 2017, cryptocurrencies saw incredible returns. Successful investors spread the word, telling their parents and even grandparents to invest.
3. Crypto in Korea through 2017
Crypto fever in Korea quickly built to a frenzy. As prices climbed higher, so did Koreans’ aspirations to become rich. By the end of 2017, one-third of the Korean public had invested in crypto. At its peak, a country that is less than 1% of the population accounted for 30% of all cryptocurrency trading in the world. The country was the third largest market in the world for Bitcoin (behind the US and Japan), and the largest market for Ethereum.
Indeed, South Korea’s millennials were Ethereum crazy throughout 2017. Many young people invested their entire life savings into Ether. Daily trading reached a fever pitch, and Koreans coined a term, “crypto zombies” for individuals that couldn’t stop checking cryptocurrency prices.
With such market penetration, Korea held a major position in the cryptocurrency markets. Any changes that impacted Korean consumers would impact the overall cryptocurrency market. Traders around the world looked to Korea and studied Korean news for indications of how the government would respond to the growing crypto trend in the country.
In July 2017, the government legalized Bitcoin as a remittance method for financial institutions. Fintech companies could now process up to $20,000 worth of South Korean won for use in Bitcoin transactions. The government also mandated that local cryptocurrency exchanges operate in cooperation with the Korean Financial Services Commission (FSC). It seemed the government had accepted and normalized Bitcoin.
4. The Kimchi Premium
Part of tying crypto exchanges to the FSC included stricter regulations for collecting data on customers and how fiat cashouts could be processed. Regulators raised KYC and AML requirements on all exchanges in the country. They also forbade minors, foreigners, and government employees from using Korea’s cryptocurrency exchanges. In essence, Korea’s crypto ecosystem became a closed system where the gateways between won and cryptocurrency were tightly controlled.
Still, demand for crypto in Korea was at an all-time high. It got to the point where Korean investors were willing to pay more than the global market value for certain coins. Over time, the premium above market price grew. At the height of last year’s crypto bubble, the premium for some cryptocurrencies was as high as 30-50% above market price.
This inflated price in the Korean market became known as the Kimchi Premium, named after Korea’s famous spicy pickled cabbage. It seems like there should be an opportunity for arbitrage somewhere, buying cryptocurrencies on other exchanges in USD and then selling them for Korean won at a markup. However, the design of the FSCs regulations is such that outside arbitrage isn’t possible. While the Kimchi premium has subsided with demand, CoinMarketCap unlisted and still does not list Korean exchange prices because they inflate market valuations for certain coins.
5. Threatened ICO Ban, Exchange Taxes, and Anonymity Restrictions
In 2017, with the Korean crypto craze reaching a fever pitch, regulators and lawmakers became increasingly concerned with the number and quality of ICOs. Many investors were only buying crypto because of the hype, without much research. Korean consumers were prime targets for fraudulent ICOs.
As a result, Korean officials announced a proposed ban on all domestic ICOs in September 2017. Contrary to many media reports, Korean lawmakers never voted on ICO ban legislation, and there’s no official government policy against ICOs. Still, the proposal had the intended effect without the need for legislation. Korean blockchain companies stopped offering ICOs in their home country and instead chose to incorporate in Switzerland or Singapore to avoid the risk of a potential shutdown.
The governmental pressure on ICOs slowed the crypto craze, but couldn’t stop its momentum. As the market continued to climb in late 2017, more Korean investors bought cryptocurrency. In December 2017, the government increased regulations be prohibiting anonymous trading on Korean exchanges. The goal was to curtail non-legal usage of cryptocurrency as a payment method. However, privacy advocates saw this as a move to restrict the open use of cryptocurrencies, monitor who is using them, and create a bottleneck on new user adoption.
In January 2018, the government continued to tighten restrictions on cryptocurrencies. This time, they announced that crypto exchanges in the country would be required to pay corporate tax at a rate of 22% plus local taxes. Such a definitive ruling made operating an exchange more expensive, and exchanges passed many of those costs on to consumers, increasing the Kimchi Premium.
6. Relaxing Regulation in the Bear Market
With the decline in the crypto market in early 2018, demand for cryptocurrency cooled off in South Korea. In December 2017, the Korean won to ETH trading pair made up over 30% of transaction volume. Today, the Korean won only represents ~2.5% of ETH trading.
One result of this cooldown is the Korean government has begun to relax its stance toward cryptocurrency. Now that buying crypto is no longer a huge investment fad in Korea, the government can begin to recognize the potential benefits of crypto and the blockchain technology behind it. In fact, in May South Korea’s central bank began exploring options for using cryptocurrencies and blockchain to back the nation’s fiat currency. Korea has a goal of becoming a cashless society by 2020, and blockchain could be a critical part of that transition.
Also in May 2018, the National Assembly officially proposed legalizing domestic ICOs, essentially reversing the earlier proposal to ban them. As part of the legalization process, however, new ICOs would likely be regulated and need to receive government approval. Considering that ICOs are effective ways for tech companies to raise capital without sacrificing equity, it makes sense that this new funding stream should be available to entrepreneurs. Regulating ICOs to prevent fraud and protect consumers is an important step in legitimizing ICOs as a business funding stream.
July 2018 brought new government proposals to recognize crypto exchanges as regulated financial businesses. These new rules also serve to legitimize cryptocurrency in the country as a valid form of investment and payment. Along with this new recognition, of course, comes increased regulation. Korean crypto exchanges will now have stricter KYC and AML requirements. Additionally, the FSC now has direct oversight and control over the cryptocurrency sector.
7. Korea’s Crypto Future
Korea has rapidly become the world’s first developed economy to adopt, recognize, and legitimize cryptocurrency. They lead the world in the percentage of citizens who use crypto and government leaders who are thinking about crypto. In June 2018, the country’s ministry of science announced the country’s Blockchain Technology Strategy. The fund will raise (and spend) 230 billion won (~$207 million) by 2022. The goal is fostering new companies and trained professionals to work in the blockchain industry.
These trends are exciting, and it will be interesting to watch Korea blaze a trail toward massive cryptocurrency acceptance. If they’re successful, Korea’s model could serve as a blueprint for other countries to follow as cryptocurrency grows in usability and popularity. As such, it’s worth keeping a close eye on Korea, as they’ll set the trend for where crypto is headed next.