How South Korea affected the cryptocurrency market last week – or did it?

Over the past few days the cryptocurrency market has experienced one of its major drops since it’s development. As many people are probably aware of it’s only been in the last few months that cryptocurrencies have become popular. Many people only investing in these assets because of major News agencies, like Bloomberg, promoting them and the fear of missing out, or as many people now call it, FOMO. Nevertheless, it’s quite clear that the majority of investors don’t understand the technology or functionality behind these assets.

As for the major drop that was experienced last week many people are arguing that it was caused because of South Korea announcing its plan on banning cryptocurrencies and the fear that many countries would follow.

This statement however was incorrect. The ministry of justice, it was in fact the justice minister himself, Park Sang-ki, claimed on January 11th that all cryptocurrency exchanges would be shut down. The government later clarified that it was only an option being considered as some exchanges were acting illegally. Over the past few months, financial authorities and prosecutors all around the world have been pursuing cases on money laundering, tax evasion, fraud and other illegal activities all caused because of this new market and many have reached the point of proposing a ban on all initial coin offerings.

It is not rare to hear about fraudulent exchanges, just recently, the exchange platform Bitconnect was accused by many, including both the founders of Ether, Vitalik Buterin and Litecoin, Charlie Lee to be a Ponzi scheme. The platform has recently shut down claiming bad PR had substantially hurt the company however earlier in November the UK register of companies revealed the British companies house had sent an official warning to Bitconnect arguing individuals listed as stakeholders appeared with inconsistent addresses and birthdates and threatening to shut down the company. Cases like this one have triggered the government of Korea’s decision.

What South Korea will actually do with the Cryptocurrency market

This past week Korea’s financial regulators have announced that there will be some regulations to the cryptocurrency market aimed at tackling speculative overheating an illegal activity. The financial services commission of South Korea announced measures to ban anonymous trading on domestic exchanges, foreigners and minors would be completely banned of currency accounts, these measures will go into effect on January 30. All foreigners will be banned from trading with cryptocurrencies in South Korea however all those with existing accounts would be able to withdraw funds even after the measures are applied but will be banned from further depositing fiat money. As for minors, Prime Minister Lee Nak-Yean said in a statement that cryptocurrencies and related assets could lead them towards crime.

Although these measures will come into place the Korean government still does not recognize digital coins as financial products or currencies and still stresses that investors are trading at their own risk as the Government does not guarantee the value of cryptocurrency.

Why are these new measures so targeted towards foreigners?

One answer could be Chinese investors. In the past months, they have been flooding South Korea’s cryptocurrency market as their country had banned cryptocurrency trade. Digital coins from China enter Korean exchanges, then are illegally change into foreign currencies and are sent back into China.

China banned cryptocurrency exchange in their own country this past November. However, they allow their citizens to trade it abroad. Many Chinese cryptocurrency exchange platforms have moved to Singapore, Hong Kong and of course South Korea. The biggest number of users however was redirected towards the latest and this sparked an unexpected volatility which the government has seen as dangerous for its financial infrastructure.

As to why countries might be interested in banning cryptocurrencies; A - As mentioned before they give ease to those willing to pursue illegal activities and B – the nature of cryptocurrencies is decentralized therefore it allows for a true independence of any state. In other words, it makes it impossible for any state to control cryptocurrencies.

Nevertheless, even if a country was interested in banning cryptocurrencies it’s a decentralized peer to peer system and this makes it costly and, more accurately, impossible to act upon.

So, South Korea is not banning crypto’s? Why did the market drop then?

For more than a week it was believed that South Korea was banning Cryptocurrencies or at least that big regulations that would highly affect the market would come, and so investors panicked. This only shows how investors belief in the market might be hanging by a thread.

Just last year for example, the creator of Ether, Vitalik Buterin, was rumored to have died in a car accident. The cryptocurrency tied to the platform, Ethereum, experienced a fall of $4 Million only to discover in a few hours that it was fake news. How volatile is that!

Last week’s drop could also be explained by some investors seeming to think that other regulations might arise in different countries whilst others welcome the anti-money laundering and new ID verification measure exchange platforms will have to put into place in South Korea as this will give more confidence in the market. However, as many fear that similar regulations might be implemented in other countries industry influencers argue that regulators have very little understanding of the technology behind cryptocurrency and therefore are regulating it with their hands tied behind their backs.

Another perfect explanation would be that investors did not understand or do not understand how the regulations might affect the market. South Korea only accounts for 0.67% of the world’s population and although in the cryptocurrency market that number is a bit higher if crypto’s would be banned investors could still trade using foreign exchanges.