South Korea, Third-Biggest Crypto Market, Faces Regulatory Tug-of-War: NFT Crackdown and Crypto Tax Debates Amid Global ETF Race

Are Investment-geared Projects on Borrowed Time?

South Korea, a breeding ground for cryptocurrency companies, has a reputation for strict regulations. This has kept foreign competition at bay, allowing domestic firms to flourish.

In the realm of cryptocurrency exchanges, for instance, only a select few have been granted licenses to operate, effectively creating a walled garden for Korean investors.

This trend appears to be extending to the world of Non-Fungible Tokens (NFTs).

The Korean Virtual Asset User Protection Act, taking effect on 19 July 2024, throws a curveball at NFT issuers.

The act mandates that companies issuing NFTs with specific characteristics – think mass issuance, divisibility, and potential use as a payment method – must register as virtual asset operators.

This new regulation casts a shadow over crypto projects that have been leveraging NFTs as investment vehicles alongside cryptocurrencies.

The additional features attached to these NFTs, designed to enhance their appeal as investments, might now be seen as red flags by regulators.

The timing of this regulatory shift is particularly interesting. The NFT market has witnessed a meteoric rise in recent times, and South Korea has seen a corresponding surge in crypto-related projects incorporating NFTs.

This regulatory move by the Korean government could be interpreted as an attempt to rein in those exploiting the NFT craze for investment-like activities within the crypto sphere.

South Korea on the Brink of Crypto Tax Showdown

In the meantime, South Korean lawmakers are locked in a heated debate over a new crypto tax law that is set to come into effect in just six months.

The law, which has been met with fierce opposition since its inception, could be scrapped altogether, with some lawmakers arguing that it unfairly discriminates against crypto investors.

A Tax on Innovation?

The proposed tax would require crypto traders to start logging their profits in January 2025 and report and pay taxes on those profits by the following May.

Crypto enthusiasts argue that the tax is unfair, with thresholds much lower than those for domestic stock market traders.

They argue that cryptocurrencies are investment vehicles similar to stocks and should be treated accordingly.

Shifting Tides

The current tax law is the latest chapter in an ongoing saga around crypto regulation in South Korea.

The tax was initially scheduled to come into force in January 2022 but was delayed by a year due to opposition.

Subsequent delays pushed the implementation date to 2025, with President Yoon Suk-yeol's People's Power Party promising further delays if they performed well in the legislative elections.

Despite the party's defeat in April, politicians are now under renewed pressure to reconsider the tax.

Is Parity the Answer?

The National Assembly Legislative Research Service has weighed in on the debate, suggesting that lawmakers consider abolishing the crypto tax in conjunction with discussions surrounding a proposed tax on gold investment.

The Legislative Research Service argues that virtual assets are similar to stocks and should be subject to similar tax treatment.

This raises the question of whether scrapping the gold investment tax would necessitate the abolition of the crypto tax to maintain fairness in the tax system.

A Race Against Time

With just six months left before the tax is set to come into effect, lawmakers are facing a critical decision.

The outcome of the debate will have a significant impact on the future of cryptocurrency in South Korea.

If the tax is scrapped, it could signal a more open and innovation-friendly approach from the government.

However, if the tax is implemented, it could discourage investment and hinder the growth of the crypto industry in South Korea.

A Nation Obsessed with Returns?

A recent survey conducted by the Korea Women's Policy Institute sheds light on the investment climate in South Korea.

A staggering 90% of respondents expressed concerns about the future returns on their pension funds, a sentiment likely fueled by the country's declining population.

This economic anxiety seems to be pushing people towards riskier investment avenues. The survey revealed that over half (52%) of Koreans invest in stocks, bonds, funds, and cryptocurrencies, with the belief that these options offer better returns compared to traditional pension plans or government bonds.

Cryptocurrency: A Double-Edged Sword?

South Korea boasts a significant crypto-investing population, with an estimated 10% actively involved.

This widespread adoption has drawn the attention of government agencies, who seem intent on establishing a robust regulatory framework for this dynamic sector.

The new NFT regulations are just one piece of the puzzle, reflecting the government's desire to strike a balance – fostering innovation while protecting investors from potential pitfalls.

The coming months will be crucial in observing how NFT-focused crypto projects and entrepreneurs adapt to this evolving regulatory landscape in South Korea.

South Korea's Bitcoin Premium: A Rebound After a Recent Dip

Bitcoin's price may have stabilised around $69,000 globally, but in South Korea, a different story is unfolding.

The infamous "Kimchi Premium," the price difference between Bitcoin on South Korean exchanges and the global average, has seen a notable rebound after dipping below 1% in recent weeks.

From Near Double Digits to Almost Flatlining

Data from Cryptoquant reveals a dramatic shift in the Kimchi Premium.

In mid-April, the premium reached nearly 10%, indicating a significant price inflation for Bitcoin on South Korean exchanges compared to the rest of the world.

However, this premium took a sharp turn, dropping to a mere 0.62% on June 4th. This meant that for a brief period, Bitcoin prices in South Korea almost mirrored global rates.

The Rebound

But the trend didn't last long. By 6 June, the Kimchi Premium had climbed back to 3.42%.

Archived data from Coinmarketcap further illustrates this point. Bitcoin traded globally at $69,288, while on Upbit, a major South Korean exchange, it was priced at $71,130, a difference of 2.658%.

Similar premiums were observed on other South Korean exchanges like Bithumb, Coinone, and Korbit.

Why the Premium?

Several factors contribute to this persistent premium in South Korea.

The country's crypto market operates in a relatively closed environment. Regulations and a lack of institutional participation restrict the supply of Bitcoin, while high retail investor demand keeps pushing the price up.

This unique market dynamic, coupled with the absence of spot Bitcoin ETFs, creates an imbalance between supply and demand, causing Bitcoin to trade at a premium compared to global rates.

South Korean Won: A Rising Player

Interestingly, the first quarter of 2024 saw the South Korean Won surpass the US Dollar in terms of Bitcoin trading volume.

Data suggests that the Won currently accounts for 2.07% of all Bitcoin trades, while the US Dollar holds 7.85%.

While US dollar-based stablecoins still dominate Bitcoin trading, the Won's rise signifies a growing role for the South Korean currency in the global crypto market.

A Glimpse into Market Dynamics

The Kimchi Premium offers a fascinating window into the specificities of the South Korean crypto market.

A high premium is often seen as a bullish signal, indicating strong buying pressure from South Korean investors.

This, in turn, could potentially push Bitcoin's price higher in the short term.

As Bitcoin navigates a period of relative stability, the Kimchi Premium serves as a reminder of the diverse market forces at play across different regions, shaping the overall landscape of the cryptocurrency world.

Crypto Exchange Graveyard in South Korea

South Korea, the booming cryptocurrency hub and the world's third-largest market according to estimates, faces a troubling trend – a graveyard of defunct exchanges leaving a trail of frustrated investors.

A joint study by the Financial Supervisory Service (FSS) and Korea Financial Intelligence Unit (FIU) revealed a shocking statistic: a staggering 70% of shuttered crypto exchanges failed to return investors' money.

This translates to a harsh reality for many Koreans.

Over 6 million, or more than 10% of the population, actively participated in the crypto market through registered exchanges in the first half of 2023. These investors, many lured by the potential of high returns, entrusted their funds to platforms that ultimately vanished, taking their hard-earned money with them.

The situation is further compounded by a complete lack of transparency.

The study found that six out of the seven failed exchanges didn't even bother to notify their customers before shutting down.

This absence of communication left investors in the dark, scrambling to recover their lost funds with no clear path forward. Even in the rare instances where some form of communication existed, the process was marred by inefficiency.

The FSS reported that these exchanges assigned a meagre one or two employees to handle the monumental task of returning customer funds, causing immense inconvenience and delays.

This raises serious questions about the current regulatory framework governing cryptocurrency exchanges in South Korea.

The lack of investor protection mechanisms and lax oversight have created a breeding ground for unethical practices.

With a significant portion of the population actively involved in the crypto market, often venturing into riskier, less established currencies, the need for robust regulations becomes even more critical.

Crypto Hub Stuck in Regulatory Limbo

South Korea also finds itself in a curious position.

Despite boasting the world's most-used fiat currency for crypto trading in Q1 2024 (surpassing even the US dollar with a staggering $456 billion volume according to Kaiko Research), local investors remain barred from the highly sought-after spot cryptocurrency ETFs.

This stands in stark contrast to the US, where the SEC recently greenlit eight spot ether ETFs, paving the way for their launch later this year. This decision follows the landmark approval of spot bitcoin ETFs just four months prior.

The Roadblock to Spot Crypto ETFs

The road to spot crypto ETFs in South Korea is riddled with regulatory hurdles.

The primary obstacle lies in the country's Capital Markets Act, which doesn't recognise virtual assets as underlying assets for securities.

This legal grey area prevents regulators, like the Financial Services Commission (FSC), from approving spot crypto ETFs.

Industry experts believe that a revision of the Capital Markets Act is necessary to accommodate a broader definition of underlying assets.

Additionally, the issue of asset custody in spot crypto ETFs needs clarification. Unlike futures-based crypto ETFs, spot funds require physical custody of the underlying cryptocurrencies.

This raises questions about the role and responsibilities of custodians, which needs to be addressed clearly in the regulations.

Missed Opportunities and Market Instability

The lack of clear regulations has significant consequences. Kim Kab-lae, a senior research fellow at the Korea Capital Market Institute, emphasises the urgency of legal reform.

He warns of potential legal disputes and market chaos if spot crypto ETFs are introduced without proper regulatory frameworks.

Furthermore, South Korea risks missing out on lucrative opportunities in the global crypto ETF market.

While the US, Canada, Germany, and Brazil have embraced spot bitcoin ETFs, and Hong Kong became the first in Asia to launch spot crypto ETFs in April 2024, South Korea lags behind.

This regulatory lag could also hinder the development of competitive products by Korean financial institutions.

The local crypto market itself suffers from the lack of diversification in investment tools.

An official from a Korean crypto exchange highlights how tight regulations contribute to high price volatility. Spot crypto ETFs, by offering a new avenue for investment, could potentially stabilise the market.

Government Initiatives and Global Engagement

Despite the current roadblocks, there are signs of progress.

Both major political parties in South Korea recognise the potential of the crypto market and have pledged to adopt digital asset-friendly policies.

The ruling People Power Party prioritises establishing a regulatory framework for virtual assets, while the opposition Democratic Party aims to enable local institutions to launch spot crypto ETFs.

The FSC is also taking steps to address the issue.

The creation of a separate division dedicated to virtual assets demonstrates a commitment to regulating this rapidly growing sector.

Additionally, Governor Lee Bok-hyun's meeting with SEC Chair Gary Gensler reflects South Korea's interest in learning from the US experience with spot crypto ETFs.

FSS Governor Lee Bok-hyun addresses attendees during a meeting convened at the FSS headquarters on April 3rd. (Source: Yonhap)

Can South Korea Catch Up?

South Korea stands at a crossroads. With the global crypto ETF market heating up, the nation has a chance to capitalise on this lucrative investment vehicle and attract institutional investors.

However, the lack of clear regulations poses a significant threat.

The question remains: can South Korea overcome these hurdles and claim its rightful place in the global crypto ETF landscape?

The country's stance on innovation will ultimately determine its trajectory: either embracing progress alongside forward-thinking peers or risking falling behind on the global stage.

Crypto Hub in Regulatory Limbo

As South Korea's cryptocurrency market thrives and enthusiasm for digital assets remains fervent, a delicate balancing act unfolds.

The government walks a tightrope between nurturing its crypto industry and mitigating potential risks.

Their recent NFT regulations and the ongoing debate surrounding crypto taxes highlight this cautious approach.

On the global stage, South Korea lags behind in the spot crypto ETF race, a potentially lucrative market currently inaccessible to domestic investors.

This regulatory lag could stifle the growth of the local market and hinder the development of competitive Korean financial products.

However, signs of progress exist. The government's acknowledgement of the crypto market's potential and the FSC's dedicated virtual asset division demonstrate a commitment to navigating this complex landscape.

South Korea's future hinges on its ability to strike a balance – one that fosters innovation and attracts investment, while ensuring a safe and secure environment for all participants.

Can this crypto hub bridge the regulatory gap and emerge as a global leader in the dynamic world of digital assets? Only a future shaped by bold policy decisions will tell.