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Will bitcoin bite the dust in 2018?

While the government considers an all-out ban, proponents are preaching the gospel of blockchain
Jan 02,2018
Left: An announcement uploaded to an online bitcoin community on Dec. 28 calling on investors to protest the Korean government’s regulations on cryptocurrency trading. Right: A handful of investors gather at Gwanghwamun Square in central Seoul on Dec. 30 to protest. [DC INSIDE, COINPAN]
In July, Jang Ki-hoon, a 35-year-old office worker in Seoul, sold half of the stocks he owned in the local market, about 6 million won ($5,600) worth, to buy bitcoin and Ethereum.

After five months, his investment more than doubled, thanks to the cryptocurrency rally that picked up in the second half of the year.

“I’m thinking about buying more before it’s too late,” Jang said during a recent visit to the customer service center of a local bitcoin exchange. “I may end up taking out a small loan in the process, but I think it will be worth it.”

Jang isn’t cashing out anytime soon. He’s betting that the market will have nowhere to go but up.

Cryptocurrencies were some of the hottest commodities in 2017, and Korea was a market mover. Investors here became the biggest buyers of virtual coins, and the fever for cryptocurrencies became a regulatory headache for the government.

Amid the looming uncertainties surrounding cryptocurrencies - and whether they should be treated as commodities or actual currencies - experts say the government and investors must look beyond the coins and their prices to find the true value of cryptocurrencies: the blockchain technology that drives them.

The blockchain is an automated digital ledger that makes financial transactions more efficient and transparent. The technology has potential uses in various industries from logistics to banking and could have a global impact. Many experts believe the cryptocurrency hype in Korea is indicative of the country’s potential role in leading the application of blockchain across industries.

Batty for bitcoin

At the outset of 2017, bitcoin and other cryptocurrencies were largely undiscovered in Korea. On Jan. 1, the price of bitcoin stood at around 1.2 million won and that of Ethereum, a major alternative coin (which refers to cryptocurrencies other than bitcoin) was at 10,000 won.

Their prices, however, saw a dramatic upturn in the middle of the year.

From May to June, bitcoin’s price nearly doubled from 1.5 million won to 3 million. Ethereum’s price went from around 90,000 won on May 1 to 280,000 won on June 1.

Although their prices experienced ebbs and flows - plummeting by more than 30 percent at some points - they began showing steady rise in the second half of the year. Their prices drastically jumped once more in December with bitcoin closing the year at around 18 million won after starting the month at around 12 million won, rising as high as 24 million won at one point, and Ethereum was at 1 million won after starting the month at about 500,000 won.

“The price of bitcoin skyrocketed this year after it was embraced by the regulated financial market,” said Kim Jin-hwa, co-founder of Korea’s oldest bitcoin exchange, Korbit, and head of the preparation committee at the Korea Blockchain Association. “In Japan, for instance, cryptocurrencies were acknowledged as legitimate means of payment [in June], which led to a large influx of private capital. In the United States, the introduction of bitcoin futures by the Chicago Board Options Exchange and Chicago Mercantile Exchange [in December] finally brought bitcoin into the regulated market there.”

Korean investors jumped on the bandwagon following the rally in June, and the nation quickly became one of the top trading markets in the world, trailing only the United States and Japan. The country’s bitcoin obsession attracted the attention of major global media outlets. In a special report that aired on Dec. 12, CNN described the phenomenon of bitcoin prices in Korea punching higher than the global average by as much as 25 percent as the “kimchi premium.” Korea, the report said, is a “good place” to start understanding the cryptocurrency frenzy around the globe and the world must keep a “keen eye” on Korean exchanges.

In a recent survey by the job website Saramin, three out of 10 workers in Korea said they had made investments in cryptocurrencies in the past few months. Many of them are easily perturbed by anything that could disrupt bitcoin trading, especially regulations.

For instance, after the government at the end of December said it was considering a ban on all cryptocurrency trading in Korea, a memo went viral on a bitcoin community website that called for investors to gather at Gwanghwamun Square in central Seoul at 8 p.m. on Dec. 30 to protest the government’s move. The demonstration took place, but only 10 people showed up.

On the same day, a lawyer in Seoul filed a petition in court protesting government regulations set to take place in the new year that would require cryptocurrency exchanges to strengthen their security and prohibit virtual accounts, which investors use to anonymously cash out bitcoin earnings.

The lawyer argued that the government’s regulations were hurting the cryptocurrency market and claimed financial damage as a result of regulatory measures fomenting distrust among the public toward cryptocurrencies.

A whole new ballgame

In the wake of the fever, the Korean government has been wrestling over how to deal with something unfamiliar like cryptocurrencies.

One of the first moves was banning initial coin offerings, in which blockchain companies sell their own coins to raise funds, in October. Korea became the second country in the world, after China, to prohibit initial coin offerings.

Especially distressing for the government has been the wildly gyrating prices of cryptocurrencies and the spate of scams targeting investors who lack knowledge and legal protection surrounding cryptocurrencies. One local exchange, Youbit, went bankrupt in December after it was hacked for a second time. Investors were unable to recoup their losses because the exchange could not provide compensation.

The events led the Ministry of Justice to form a task force on Dec. 4. That the ministry was tasked to lead it instead of the Financial Services Commission, the financial regulator, was an indication of how seriously the government was taking the issue - and a signal of the government’s intent to regulate the cryptocurrency trade.

Since then, the government has devised a number of measures including a ban on trade by minors and foreigners and the prohibition of virtual accounts. These measures went into effect on Monday with the new year.

Now, the government is mulling the possibility of shutting down exchanges altogether. Top officials, too, have expressed hawkish views.

“Digital currencies and cryptocurrencies are not financial products, nor are they real currencies,” said Choe Heung-sik, governor of the Financial Supervisory Service, Korea’s financial watchdog, during a recent meeting with local reporters.

Choe also emphasized that cryptocurrencies and blockchain technology should be seen “independently” and that the latter has potential for significant growth in the future.

Other officials have made similar remarks, an indication of the current administration’s official stance on the matter.

“We should not mix cryptocurrencies and blockchain but look at the two separately,” said Yoo Young-min, the minister of science and ICT, during a meeting with reporters in December. “The blockchain is a field that the ministry must devote itself to next year” to further promote its application.

Industry experts, however, argue that such statements demonstrate a fundamental lack of understanding of the blockchain ecosystem.

“Coins and tokens, they all have their roles in what we call the ‘token economy,’” said Kim Seo-joon, CEO and co-founder of Hashed, a local investment firm that funds global blockchain projects.

The token economy refers to transactions conducted through cryptocurrencies. “They are created to accomplish certain business purposes,” Kim said referring to the tokens. “For instance, Ethereum and Qtum work as platforms for smart contracts, providing a network that others can use to build services.”

Cryptocurrencies like bitcoin are mined by computers that eventually become nodes to connect a network. Each node records transactions in a block, which is organized with others to create a type of ledger.

The coins are rewards for a computer to become this node, which is necessary to maintain a blockchain network. This means coins are a vital element in blockchain technology.

“While everyone equates cryptocurrency investment to gambling, there is a huge difference between the two, as cryptocurrencies have value beyond money as a part of protocols that are designed for specific purposes,” said Joyce Kim, co-founder of Stellar Lumens, currently the 10th-largest cryptocurrency in the world by market cap, and managing partner of SparkChain Capital, a venture capital fund created by start-up accelerator SparkLabs to invest in blockchain-related companies.

Stellar, for instance, which Kim developed with Jed McCaleb, creator of the peer-to-peer file sharing service eDonkey, was created specifically to facilitate online payments using its cryptocurrency.

This is not to say that there is a dearth of voices in the industry calling for some level of regulation.

“They need consumer protection,” McCaleb told the Korea JoongAng Daily in early December while visiting Korea to attend SparkLabs’ Demo Day. “A lot of people are buying these coins just because they see the prices going up, and putting a little bit of damper on that is not necessarily a bad thing because there are coins without sound technical foundation, which will eventually fail to leave some people hanging out to dry.”

Kim suggested the government remain open to working with the industry to devise self-regulating measures because the blockchain is a “powerful combination of internet and money” on which other industries can grow. She sees possibilities for companies working in artificial intelligence and data analysis to build their businesses on the blockchain.

If cryptocurrencies are outright banned, she warned, “it will go underground and if they go to the dark web,” the portion of the internet that is difficult for most users to access, “they will be used for criminal activities.”

Right now, though, the Korean government has yet to decide on how to categorize cryptocurrencies, meaning the regulatory purview remains vague. So far, the Financial Services Commission and Ministry of Justice have been maintaining a touch-and-go approach, focusing on protecting investors who have put money into cryptocurrencies.

“Under the current law, the legal characteristics of blockchain and bitcoin are not clearly defined,” said Choi Gong-pil, a director at the Center for Finance and Technology at the Korea Institute of Finance. “But to fully maximize the utility of blockchain and bitcoin, the government must come up with fixed regulations and clear legal definitions.”

The Korea Institute of Finance recommended in late December through a report that the government should consider creating a cryptocurrency of its own as an “anchor” to minimize price fluctuations.

“If the central bank issues cryptocurrencies, it will be able to provide a cheap payment method to the public and minimize the cost of printing and transactions,” said Lee Tai-ki, a senior research fellow at the institute.

McCaleb believes it is “natural” that governments around the world are considering creating their own cryptocurrencies since they already issue fiat currency. However, he said the ideal situation would be for governments to issue cryptocurrencies that are compatible with each other, meaning they can easily be traded with each other without incurring high costs.

Beyond the hype

Market observers agree that the Korean cryptocurrency trade is overvalued.

“The fever in Korea is happening without proper education but entirely based on the ostensible graphs that merely show the drastic rise in prices,” said Kim Seo-joon of Hashed. “The problem is looking only at the graph and being completely oblivious to the value behind it.”

Instead of trying to forcibly eliminate cryptocurrency trading, proponents argue that the government should channel the hype into promoting the development of blockchain technology.

“There is a ton of hype here, which is outpacing the reality in what these things can actually do,” McCaleb of Stellar said. “Because it is overhyped, there are a lot of innovations and developments that it’s even hard for me to keep pace with. There will be eventually some form of corrections, but I think it is a natural cycle for an industry to develop.”

Indeed, there is already movement in Korea’s private sector to utilize blockchain outside cryptocurrencies. Kim Seo-joon and his team at Hashed have been making aggressive investments in local blockchain projects.

“We have made commitments to some 25 different projects inside and outside Korea this year,” Kim said. His company manages a 150 billion won fund, and each investment ranges from as little as 300 million won to as much as 4 billion won.

Hashed’s raison d’etre includes not only supporting blockchain start-ups but also educating the general public about the technology. Its projects cover a wide range of industries, including Medibloc, which stores and secures medical records using a blockchain, and Pluto, a research paper publishing platform.

The company is also one of the biggest investors in Icon, currently the 23rd-largest cryptocurrency in the world by market cap, according to CoinMarketCap. Most of the projects funded by Hashed, including Icon, are led by Korean developers.

There is also a company called Blocko that is putting blockchain technology into a wide variety of applications. The company works with both the public and private sectors to enhance their businesses. Clients include Hyundai Motor Group and the Gyeonggi Provincial Government.

At Hyundai, Blocko provided the automaker with a blockchain-based e-document management system that securely stores important papers like employee contracts by distributing the data amongst the company’s computers to protect them from hackers.

In Gyeonggi, the company developed a blockchain-based e-voting system that allows government officials to securely make votes on important agenda items online.

“For Korea to take a central role in the blockchain industry, we need more promising projects,” Kim said. “Each time something new comes along, we’ve seen a bubble, but the bubble itself is a double-edged sword. While it has the potential to burst, it also incentivizes entrepreneurs to try something new.

“Because it is a bubble,” he continued, “any services or projects that fail to create certain value will disappear, but there will always be a small number of pearls inside the clams that will grow to become the next Google or Facebook.”

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]