It has not been long since all focus was on the stock market with the Korea Composite Stock Price Index (KOSPI) breaking the 3000 point ceiling. Now it seems to be cryptocurrency that is taking grip of the entire nation. Many college students hold tightly onto their phones, refreshing the charts of cryptocurrency exchanges all day long, and employees can barely focus on their jobs, daydreaming of becoming full-time investors. However, besides simply joining in because it is a trend, there are various reasons to enter the cryptocurrency market. Some invest small amounts of their allowance as a hobby, while others invest heavily in hopes of achieving sudden wealth and quitting their jobs. Whatever the motivation, it seems cryptocurrency has certainly become a key element of the Korean youth’s financial lives.

Stock Investment Fever Grips Korea

Due to the low-interest rates introduced by countries to overcome the effects of the coronavirus disease (COVID-19), large amounts of currency in the market have been rapidly flowing into the stock market, and Korea has not been an exception. The driving force behind the stock market boom in Korea is the "Donghak ants," referring to Koreans in their 20s and 30s who have put much into stock investment in the hope for a better financial future. As such, many young people are betting their dreams of wealth on the results of their stock investments, encouraged to do so by a constantly soaring stock price index that knows no bounds amid a depressed economy.

Nonetheless, issues have risen due to the stock market boom. Young people looking to invest often take out extensive loans and consequently become saddled with debt and become credit delinquents. They are easily seduced by investment advisory companies that give dubious advice on financial investment products for general investors. Above all, the question of whether the real economy can support this sudden rise in the financial market has yet to be resolved.

Upbit Lounge in Gangnam. Provided by Yonhap News.
Upbit Lounge in Gangnam. Provided by Yonhap News.

Rise of Cryptocurrency

Inspired by the stock market boom, investors in their 20s and 30s have also turned their attention to the cryptocurrency market, which, since the mini boom in 2017, has been relatively quiet. Put simply, cryptocurrency is a piece of electronic information that is encrypted with blockchain technology and distributed as a currency within a network. Blockchain technology is essential to digital money like cryptocurrency as it prevents virtual currency trades from being hacked; it also provides an open dispersed ledger that effectively and permanently records transactions between the two participating parties.

Cryptocurrency and virtual currency are both forms of digital money, but they differ in that virtual currency is issued and managed by a single developer, while cryptocurrency is distributed and managed by whoever has it. Without a central organization that manages issuance and distribution, users who participate in the cryptocurrency network issue money on their own and jointly manage the content of transfers using peer-to-peer (P2P) technology. Most cryptocurrency can be generated by anybody and is created at a predictable and limited rate.

P2P Technology. Provided by the Korea Herald.
P2P Technology. Provided by the Korea Herald.

Cryptocurrency acts as a reasonable means of remittance, eliminating cumbersome documents, late processing, and expensive commissions. It can also serve as a method of payment both online and offline. It is impossible to impose inheritance tax or gift tax on cryptocurrency due to its anonymity and difficulty in tracking transactions. In other words, there are no barriers between countries for cryptocurrencies, and they have a low commission burden.

However, cryptocurrency’s fatal defect is that its value cannot be guaranteed yet. For instance, the United States (U.S.) electric vehicle company Tesla had announced a change in its management policy which would allow customers to purchase its electric vehicles with Bitcoin, and then not long after suspended its use as a payment. Apparently, the negative impact on climate change due to the excessive use of fossil fuels when mining Bitcoins was their main concern. Since the value of cryptocurrency is ever-changing, users cannot ensure its durability as a method of payment in future transactions.

Despite its faults, there are definite reasons why young people are trying to make money by selling off their stock shares and buying cryptocurrency. First of all, unlike the securities market and the Korea Securities Dealers Automated Quotation (KOSDAQ) market, the cryptocurrency market is open 24 hours a day, there is no maximum or minimum market price, and it is faster to liquidate ⸻ cryptocurrency can generate profit immediately while it takes time for a deposit to arrive after a stock sale. Moreover, unlike stock investments, for which an investor should analyze a company's future value and financial statements, cryptocurrency investments are relatively capable of being made on intuition.

Most importantly, cryptocurrency has extremely unstable and differing market prices. Taking advantage of the fact that their market prices differ depending on the exchange, some people make a profit by purchasing cryptocurrency from exchanges with low market prices and selling it on exchanges with high market prices. The number of young people entering the cryptocurrency game has significantly increased mostly due to the easy profit that this property of cryptocurrency allows. Many have begun dealing cryptocurrency because they fear missing out on an opportunity to make easy profit.

According to Professor Kim Jinill (Department of Economics), investors who have experienced the stock market boom caused by the COVID-19-induced higher liquidity seem to have the same expectations of the cryptocurrency market. Having had a taste of what sweet profit can be earned from the stock market boom, the younger generations hold mostly good memories of financial investment and, therefore, are looking to achieve similarly successful results once again in the cryptocurrency market. Thus, much money has flowed from the stock market to the cryptocurrency market, which can also be seen as a digital revolution in the financial investment sphere in the long run.

To date, there has been a negative attitude toward the use of cryptocurrency as a banknote in that it is subject to extreme short-term fluctuations in price, making its intrinsic value impossible to guarantee. Recently, however, that seems to be changing; for instance, the U.S.’s biggest cryptocurrency exchange Coinbase is now listed on the NASDAQ, PayPal and Visa have decided to allow digital currency as a means of payment, and Bitcoin is now globally recognized as digital gold rather than a speculative asset.

Professor Kim Jinill. Provided by Professor Kim Jinill.
Professor Kim Jinill. Provided by Professor Kim Jinill.

Cryptocurrency’s Extreme Instability

While the Korean public is currently in a craze over cryptocurrency, it seems that not all experts share the same enthusiasm for it. Because cryptocurrency is characterized by rapid changes in value, the analysis of its prospect differs dramatically between experts. After investigating both the positive and negative consequences of this type of virtual asset, Professor Kim claimed that the development of digital currency will have a positive impact on the popularization of digital technology, particularly reflecting the confidence and familiarity of the younger generation towards digital items.

However, he also stated that governments are correct to define cryptocurrency as a virtual asset in that they have no intrinsic value; therefore, there is no other way to utilize it if it fails to function as a medium for transactions. In addition to their use as currency, water can be drunk and gold can be useful in the fabrication of electronic devices; even stocks, which at times seem virtual, guarantee shares of an existing company ─ this is not the case for digital currency. The digital currency has no intrinsic value, so if it is no longer in demand, its value will plummet.

However, most used currencies are like that, which is why in most circumstances, only the kinds of money that are approved and managed by governments are used in transactions cause then, it is considered safe. Therefore, the same logic follows that money not recognized by a central authority, such as cryptocurrency, may not survive in the long run. For reasons such as lacking intrinsic value and not having a central authority, Professor Kim argued that it is unlikely cryptocurrency will solidify its status as a meaningful asset all throughout the nation and remain so in the long run. However, he also stated that if such an event does occur, it will have consequences the government will not be able to ignore.

Trading and Its Risks

Aside from the debate on cryptocurrency’s outlook, jumping on this massive cryptocurrency bandwagon as an investor has many risks. Despite its main point of attraction, —– the possibility of making a pile of money with a single transaction —– its inherent risks remain a danger. Primarily, this cryptocurrency craze has led to an overcrowded market, resulting in the ominous possibility of a bubble forming. According to Etoday, the representative cryptocurrency Bitcoin has gathered over three million monthly investors since February, with 59 percent of them being in their 20s and 30s. A bubble market is considered a ticking time bomb because it is bound to collapse, hurting everyone involved, as did the U.S.’s stock market crash in 2008.

Many experts point out that cryptocurrency markets currently resemble the Dutch tulip bubble market of the early to mid-1600s, when irrational speculation drove the value of tulip bulbs to extremes. The madness surrounding tulips did not abate until its price reached six times the annual salary of a regular worker. When the bubble burst, the savings of investors, which should have been directed elsewhere, disappeared.

What makes this analogy even more concerning is the inherent volatility of cryptocurrency. At least tulips, the center of the first financial bubble ever recorded, were tangible goods. With cryptocurrencies, however, a few seconds can signal the onset of a huge fall in value of money that only exists virtually. The government is now worried that the domestic economy is now at the mercy of a potential collapse of a bubble. The domestic cryptocurrency market is filled with so-called “kimchi premiums,” which are the higher premiums that cryptocurrency sellers can gain in the Korean market compared to other markets around the globe due to the lack of supply and high demand in the domestic market.

Such kimchi premiums being the main temptation in this strong cryptocurrency wave, the potential collapse of a bubble state can strike domestic investors harder. In 2019, one unit of Bitcoin was sold for over 80 million won, which quickly dropped down to 50 million; it is now at 60 million won. This sort of massive fluctuation is highly characteristic of an over-heated market that is bound to collapse. Considering the aggravation of an already-deteriorating economy, relevant measures are desperately needed to save numerous investors.

Weak Regulations

As with all novel phenomena, the crypto-boom has also led to a rise in related crimes. The volatility of cryptocurrency leaves loopholes that are relatively easy to manipulate by taking advantage of the margins resulting from illicit transactions. The number of illegal transactions that aim to disrupt stable market conditions has risen due to the emergence of cryptocurrency. According to Professor Lee Hyo-Kyung (School of Law, Chungnam National University), fraudulent attempts of similar deposit-taking are on the rise. Similar deposit-taking refers to deposit-taking or fund-raising activities without official permission from related financial institutions. They misleadingly entice the investors by making the whole trade look like a promising initial coin offering (ICO), which is a widely used fund-raising technique via cryptocurrency. In the digital era, companies now raise funds through cryptocurrency in addition to traditional forms of currency. If investors deposit cryptocurrency in the companies’ accounts, companies give out their distinct digital tokens in return.  Latching onto the ICO’s increasing popularity as a source to swiftly raise funds, criminals deceive investors into depositing in fictitious accounts; a few seconds can strip away all of their digital assets without leaving a trail to track down the fraud.

Professor Lee Hyo-Kyung. Provided by Market Economy.
Professor Lee Hyo-Kyung. Provided by Market Economy.

According to Reuters, fraud was the most widespread form of cryptocurrency crime in 2020, followed by theft. Half of all theft cases, amounting to around 129 million U.S. dollars, involved hacking through decentralized finance (DeFi) services, which are transactions on platforms that facilitate lending outside of banks. Free from the control of monitoring organizations, DeFi has been linked to a range of intellectual property crimes that can easily avoid prosecution. The loose controls on DeFi have enabled numerous DeFi platforms to avoid traditional regulatory enforcement practices. Because they do not have to enforce customer verification, they have become the perfect instruments for money laundering. Current regulations centered on restricting fraud in centralized platforms are pushing criminals to exploit DeFi services, which makes it difficult, if not impossible, to track illicit monetary transactions.

Fraud and the theft of cryptocurrency are possible as criminals employ sophisticated ransomware or virus-injected websites to hack the victim’s computer to mine cryptocurrency, which is called “cryptojacking.” Also, even though the entire system of cryptocurrency is shielded by blockchain technology, it cannot protect coins being stolen from digital wallets out of the blockchain’s reach. There is no perfect way to overcome technical glitches and guarantee 100 percent security for all investors, which strongly calls for more effective regulations to prevent ever-surging crimes. According to Professor Ko Dong Won (School of Law, Sungkyunkwan University), there is virtually no regulation on cryptocurrency to protect investors from fraud and theft. Professor Ko explained that cryptocurrency is not accepted as a form of currency in legal terms due to its high volatility and because it is not universally used as a medium of exchange. This means that the existing Financial Investment Services and Capital Markets Act does not cover cryptocurrency, and manipulative investors cannot be punished.

Professor Ko Dong Won. Provided by Professor Ko Dong Won.
Professor Ko Dong Won. Provided by Professor Ko Dong Won.

Three-Year Delay Now Proving Damaging

Since March 25, a revised version of the Enforcement Decree of the Act on Reporting and Use of Certain Financial Transaction Information has been implemented for investors in cryptocurrency. The most important implication of this new regulation is that it marks the first step in institutionalizing the hitherto-unregulated field of cryptocurrency. It employs “virtual asset” as an umbrella term for various types of cryptocurrency and specifies the obligation to file returns for the profits yielded from it to deter money laundering.

However, the introduction of the new regulation cannot erase the three-year delay in passing relevant laws on cryptocurrency, especially Bitcoin. Bitcoin made its dramatic debut in 2017 when its value surged dramatically. Many experts point out that this would have been the optimal time for the government and monitoring bodies to establish proper preventative measures. Unfortunately, at that time, the government took a laissez-faire approach to the cryptocurrency market and simply designated several banks and financial institutions to monitor illegal actions. The government did not approve of cryptocurrency then and dismissed it as an intricate form of gambling. In fact, on January 11, 2018, the then Minister of Justice Park Sang-ki remarked that cryptocurrency had very similar characteristics to gambling and that he would provide immediate measures to shut down all marketplaces to prevent any side effects.

The conservative attitude of the government at the time squandered the opportunity to enthusiastically develop the domestic cryptocurrency market. It also prohibited individual investors from engaging in overseas transactions to purchase Bitcoin, and artificial accounts to exchange cryptocurrency were not permitted by financial institutions. This myopic response by the government continues to have ramifications now, with the U.S. and Japan, who both introduced proactive measures to foster the industry, leading the global crypto boom. The new regulations, established in the hope of protecting cryptocurrency transactions, fall short in making up for the three-year delay during which digital crime has emerged through many loopholes. Professor Ko argued, the measures that should have been taken if there were to be any success in monitoring manipulation are stronger regulations for professional dealers of cryptocurrency which would make them officially list themselves as legitimate dealers.

Minister of Justice Park Sang-ki on cryptocurrency. Provided by RBS.
Minister of Justice Park Sang-ki on cryptocurrency. Provided by RBS.

Desirable Policy Directions for Cryptocurrency

The recent revision of the Enforcement Decree of the Act on Reporting and Use of Certain Financial Transaction Information has been criticized as a passive measure. Professor Park Sun Jong (School of Law, Soongsil University) explained that the revision itself falls short in practically helping investors as it solely focuses on preventing money laundering. This leaves a legal void in punishing illegal trades involving digital currency, even though similar trades are heavily punished in the stock market. During an academic seminar on cryptocurrency and relevant measures, Kim Byung-wook, a legislative member of the Democratic Party of Korea (DPK), remarked, “The new regulations lag behind the fast-paced change in the crypto boom as they merely meet the minimum requirements of the Financial Action Task Force (FATF), the global organization aiming at combatting money laundering. Rather than resorting to meeting the global minimum standards, the government should be more proactive and design more concrete regulations on virtual assets in the Virtual Asset Act.”

Professor Park Sun Jong. Provided by Etoday.
Professor Park Sun Jong. Provided by Etoday.

The inherent limitations of the existing Financial Investment Services and Capital Markets Act point to the necessity of novel legislation centered on protecting users and promoting the growth of the industry at the same time. Professor Park argued that as the world is getting closer to a consensus that cryptocurrency is one sort of investment goods, only a cryptic one, and so there should not be additional legislation but rather reinforcements of existing regulations to incorporate cryptocurrency. He maintained that the best and simple way to do this is to amend Article Three of the existing Financial Investment Services and Capital Markets Act to include cryptocurrency as one type of investment goods.

Until necessary policies are enacted, investors need to look out for themselves and take a more cautious approach to cryptocurrency. The addictive nature of cryptocurrency necessitates wise distancing to prevent immense social losses stemming from reckless investing. On this, Professor Kim Jinill offered advice on investment for the younger generation in this uncertain age. Although digital technology is future-oriented and full of potential, uncertainty cannot be avoided because assets are associated with individual beliefs. Therefore, it is important to make an investment based on a personal assessment of value. Opinions on the future of digital currency depend on factors such as the age and occupation of those making the valuation. If an investor is confident that the dollar will disappear in the future, they may invest all their assets in cryptocurrency. For those not willing to lose a large amount of money, Professor Kim recommends investing only a portion of their assets. Investing a reasonable amount so that the investor can still be in charge of their choices and decisions, he says, is a safe and efficient way to generate profits.

On a macro-level, the government should be bold in implementing measures that monitor financial wrongdoing but also measures that facilitate the growth of the domestic cryptocurrency industry, especially the latter in order to rectify the consequences of its inaction three years ago. Finding the right measures is inherently difficult considering the cryptic nature of this virtual asset. Nonetheless, this should not be an excuse for the absence of necessary measures. An increasing number of citizens are investing their future in this new form of digital currency, and they are in desperate need of legal protection and proper guidance. Sometimes imminent danger can be a golden opportunity to progress. This also applies to this cryptocurrency craze, which may be an opportunity for Korea cross the threshold into a bright, prosperous future for the domestic cryptocurrency industry and a boom in the domestic economy.

 

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