This piece was updated on April 16 to reflect the results of South Korea’s elections, and again on October 24, 2024.
Summary
- South Korea’s opposition won the parliamentary vote in a victory on April 10, giving the liberal bloc, led by the Democratic Party of Korea (DPK), the chance to push its crypto-related campaign pledges, including allowing investors to buy spot BTC ETFs.
- ETFs and taxation found themselves on the agenda for the April general elections, particularly for voters in their 20s and 30s – the demographic most interested in the sector.
- Overall, the authorities have a suspicious and cautious approach to crypto and are pursuing regulation and legislation that protects the customer and enhances transparency.
- Read other Crypto in Action articles.
How do South Koreans use crypto?
South Korea was quick to adopt blockchain and cryptocurrencies and the country is regarded as something of a digital currency hotspot.
South Koreans can own cryptocurrencies and trade on licensed exchanges. They are not considered legal tender or financial assets in their own right. This has not dented their popularity and trading cryptocurrencies powers the sector’s growth in the country. Typically, locals favor high-risk, high-reward crypto investing. There is also great interest in – and fanbases for – esports and blockchain gaming.
Locals prefer altcoins to assets like Bitcoin or Ethereum. In March, five local cryptocurrency exchanges (Bithumb, Coinone, Gopax, Korbit and Upbit) recorded a higher trading volume than the value of shares traded on the stock exchange, registering 11.8 trillion ($8.8 billion) won to the traditional market’s 11.4 trillion.
The country had its first crypto boom in 2017, and again ahead of Luna and TerraUSD cryptocurrencies’ collapse in May 2022. This event deflated the sector and its prospects but during 2023 a recovery began, and in March 2024, the Korea Premium Index reached its highest level since May 2021.
There is currently no regulatory framework to tax virtual assets, although once sold, cryptocurrencies held as investments are subject to capital gains tax.
Domestic Initial Coin Offerings (ICO) are banned in South Korea, the asset management market for crypto is small, and cryptocurrency mining activities are limited.
What crypto election pledges did the parties make?
Crypto found its way onto the agenda for the April general elections, particularly for voters in their 20s and 30s, who are the demographic most interested in the sector. ETFs became one electioneering issue – the then-ruling People Power Party (PPP) made a number of pledges, including investigating allowing Bitcoin ETFs, while the then-opposition Democratic Party said it would allow their purchase. In addition, the PPP said it would establish a digital asset promotion committee and prioritize a regulatory framework with regard to taxation.
President Yoon Suk-yeol, who came to office in 2022, is pro-crypto. He publicly supports the sector and has sought to deregulate the sector, including legalizing security tokens. In February, his office urged the FSC to adopt a more flexible approach to crypto, particularly on the issue of Bitcoin exchange-traded funds (ETFs). The president’s office emphasized the need for the commission to consider global developments, a nod towards the US Securities and Exchange Commission (SEC)’s pro-ETF decision.
In February, the FSS announced it was seeking guidance from the US SEC, with its governor, Lee Bok-Hyun, expected to pursue visits to major financial markets, including New York, in the second quarter, to discuss South Korea’s financial markets. During his visit to the US, Lee has said that he will meet with SEC Chair, Gary Gensler, to discuss Bitcoin ETFs.
There are also signs that South Korea is shaping regional policy towards crypto. In March 2024, its regulators held talks with officials from the Association of Southeast Asian Nations (ASEAN), to “share the progress of digital finance policies in ASEAN countries.” Also on the agenda were discussions about resolving sector-related risks.
What is the South Korean government’s attitude towards crypto?
Reporting by crypto service providers has historically been based on guidelines not laws. Regulations related to the sector are, understandably, influenced by the government’s policy stance, which has shifted significantly in recent years.
The authorities are cautiously supportive and have been strengthening their oversight of the sector and improving its transparency.
The popularity of cryptocurrency trading with initially few legal guardrails created a risky environment. Exemplifying this was the demise of the domestically hugely popular (and homegrown) Luna and TerraUSD cryptocurrencies, which resulted in public outcry.
As a result, the authorities have gradually introduced regulation that addresses problems as they’ve arisen, but have yet to produce one overarching piece of legislation.
This is changing in the form of the Digital Asset Basic Act (DABA), which comes into effect in June. Comprising 17 proposals, it is designed to balance the development of blockchain with protection for investors.
The previous prevalence of scams and crypto risks has also given rise to sizeable penalties for offenders. Legislation due to come into effect in July in the form of the Virtual Asset Users Protection Act, imposes prison terms (including life sentences for individuals who accumulate more than 5 billion won ($3.8 million) from illicit crypto schemes) and fines of between three and five times the amount of the illegal profit.
The authorities compel both public figures and companies to disclose their crypto holdings, and exchanges are also heavily monitored. In February 2024, it was reported that the country’s Korea Financial Intelligence Unit (KoFIU) was planning to expel from the marketplace those exchanges that failed to meet forthcoming stringent standards.
What are the key pieces of crypto legislation in place?
The Electronic Financial Transactions Act and Act on Reporting and Use of Specific Financial Information broadly provide the regulatory framework for cryptocurrency and digital assets. The first defines cryptocurrencies as ‘electronic assets’ and provides the rules for their use. This includes anti-money laundering (AML) requirements and know your customer (KYC) checks. The second act requires financial institutions to report suspicious financial transactions, including those related to cryptocurrencies.
Cryptocurrencies are regulated under AML and securities regulations, enforced by the Financial Securities Commission (FSC). In July 2024, the authorities introduced the Virtual Asset User Protection Act, designed to curtail unfair trading practices and safeguard users’ deposits and virtual assets. Additionally, the onus is now on crypto firms to monitor and report suspicious transactions, and regulators have the authority to supervise, inspect and approve virtual asset trading platforms.
By September 2024, 11 asset exchanges had shut down and a further three had temporarily suspended their services, leaving 17.8 billion won ($12.8 million) in investments for customers to claim.
The role of large conglomerates in the digital assets sector
Spotting an opportunity, and buoyed by improving regulation and transparency, large South Korean companies are moving into the digital asset space. Among the most notable activity has been the country’s largest mobile provider, South Korea Telecom’s tie up with blockchain platform Aptos and developer Atomrigs Lab to create a crypto wallet, the T wallet, in November 2023.
Samsung Asset Management has been active in bitcoin futures for several years. The firm described as a “pioneer in the South Korean ETF market” launched its first ETF in the country, and is now moving into other markets in the region. In January 2023, the firm announced the launch of the bitcoin futures ETF, listed on the Hong Kong stock market.
Timeline of crypto regulation and action
2018
The government sought to regulate cryptocurrency trading. Trading was allowed only from real-name bank accounts.
In February, then-head of the FSS, Choe Heung-sik announced the government’s support for cryptocurrency trading and pressed financial institutions to facilitate transactions with exchanges.
In March, an amendment was made to the Act on Report and Use of Specific Financial Transaction Information (which came into effect in March 2021), requiring all South Korean virtual asset service providers to tighten up regulations on bank accounts, including expanding AML and KYC provisions.
2022
In May, the authorities unveiled plans to regulate ‘security-type tokens’, based on the Financial Investment Services and Capital Markets Act (FSCMA). This was part of the Digital Asset Framework Act, which aims to regulate virtual/digital asset-related issues.
In August, the government created a joint public-private taskforce with the aim of developing a more robust, regulatory framework. This resulted in essential measures being enacted in April 2023, followed by comprehensive legislation for virtual asset users in June 2023.
2023
In February, the FSC released a plan designed to improve regulations related to issuing and distributing token securities.
In June, the National Assembly passed the first part of the Virtual Asset User Protection Act. This is designed to regulate the market primarily for the benefit of better protecting consumers and investors. It marked the first local law designed solely to regulate virtual asset services and allows the authorities to act against virtual asset business operators.
In July, an interagency investigation agency – the Joint Investigation Centre for Crypto Crimes – was launched.
In October, the FSS announced that it was preparing regulation to supplement the Virtual Asset Users Protection Act to strengthen its regulatory framework ahead of it going into effect in July 2024.
In December, the FSC proposed rules to protect users of crypto exchanges. Exchanges would be required to store at least 80% of their customers’ deposits in cold wallets, and would have to pay fees to customers for using their deposits.
2024
In January, the FSC proposed banning credit card use to buy cryptocurrency, arguing it was seeking to stop the illicit outflow of domestic funds overseas.
In July, the authorities enacted the Virtual Asset User Protection Act, which introduced strict practices in an attempt to prevent unfair trading practices.
A turning point for crypto policy?
On April 10, the liberal Democratic Party of Korea (DPK) and its smaller allies secured a victory in the parliamentary elections, gaining control of 192 out of 300 seats. The outcome, was interpreted as a referendum on President Yoon Suk Yeol’s administration. He and his party, the PPP, struggled with issues like inflation and public dissatisfaction, which were highlighted during the campaign.
The DPK promised reforms, such as the introduction of spot Bitcoin ETFs, which could attract both institutional and retail investors. These policy items reflect the significance of digital assets in South Korean politics, possibly influenced by the increase in crypto investors within the country. As of September 2023, South Korea reported having 6.27 million crypto users, showcasing the political impact of this demographic. Promises related to crypto acted as critical voting incentives in this electoral round, particularly among younger voters who form a substantial part of the crypto community.
The political trajectory set by the election is now shaping South Korea’s regulatory environment for crypto policy. The DPK’s control might lead to quicker implementations of their crypto policies, potentially making South Korea a more attractive market for crypto investments globally.
This election not only reflected internal political dynamics but also put South Korea in a crucial position in terms of global crypto policy trends. As the country moves forward, the integration of digital asset policies will likely play an increasingly central role in shaping its economic and technological landscape.
Outlook: Government and crypto industry need to work together
The collapse of the Luna and TerraUSD cryptocurrencies had an undeniably large impact on South Korea’s crypto investors. Although all signs are that the sector is recovering well, the authorities have worked hard – and will continue to do so – to make the sector and its dealings as transparent as possible, and protect consumer and investor interests.
The country is only one of eight worldwide that enjoyed cryptocurrency profits of more than $1 billion during 2023. There are indications that the country is seeking to become a regional leader in adopting and regulating cryptocurrencies, and the fact that crypto has featured as an election pledge, is testament to the authorities’ seriousness.
South Korea does, however, face stiff competition. Singapore has assumed the position of digital assets hub and is cementing this through legislation as well as in areas like education. Other regional players, like Thailand, are also vying to achieve a hub-like status, so this places the emphasis on South Korea’s legislators and regulators to create a welcoming but safe environment that promotes innovation.
In this respect it needs to look at the sector holistically, and boost investment into areas like digital assets education, and pursue more of a regional role on digital matters. But it’s not just the government that has to work to create the regulation and a favorable environment for the continued growth and development of the sector. Digital asset players also need to participate in supporting and promoting the industry.
