South Korea’s Crypto Crackdown ups the Stakes

Cryptocurrency prices kicked off 2018 with a fantastic run-up. But now, cryptocurrency infrastructure is under attack from the powers-that-be. As a result, digital coins everywhere are collapsing.

This week, Reuters reported South Korean regulators plan to ban cryptocurrency trading on local exchanges. On Thursday, officials began raiding those exchanges’ offices.

Crypto investors should prepare for more bombshells and more opportunity.

Bitcoin was born in the shadow of the 2008 financial crisis. It was a response to the worldwide failure of governments and central bankers to protect the value of money.

By design, it is decentralized. The powers-that-be have no governing authority. It is part of the long-term appeal of cryptocurrencies.

It’s the reason they have value. It’s the reason they are not going away. 

That is causing consternation among elites. Digital coins pose an existential threat to the traditional world order and centralized authority. As acceptance grows, governments are likely to push back.

South Korea has become the hotbed of the cryptocurrency movement. There are more than a dozen exchanges. They account for 20% of bitcoin transactions worldwide. That percentage is even higher for XRP, the digital coin associated with Ripple. One-third of all such transactions flow through the country.

Related story: The Ripple Effect

Targeting local exchanges is surgical. It is like dropping bombs on bridges and railroad lines.

Over the long term, these kinds of strikes may help cryptocurrencies.

Currently, the exchange mechanism itself is the big weakness …

Prices vary depending on the exchange, or geographic location. There is enormous execution discrepancy. And unlike Blockchain (the distributive ledger that underlines all digital coins), there is very little transparency.

This means investors can never be truly sure their transactions are fair or adequately secured.

South Korea has become the hotbed of the cryptocurrency movement, with more than a dozen exchanges like Bithumb and Coinone. This week, police and tax officials raided several of those exchanges’ offices.

Last December, Youbit, a smaller Korean exchange, filed for bankruptcy. Hackers stole 4,000 bitcoins, about 17% of the cryptocurrency assets it held for customers. It was the second attack in six months.

While Youbit did issue a public apology, its customers bore the burden. Accounts were marked down to 75% of their pre-heist level.

The theft followed a September report from FireEye Inc. (FEYE), a Silicon Valley cybersecurity firm. In the wake of severe United Nations sanctions, researchers allege North Korea began a series of cyber-attacks against its southern neighbor.

The rising price and secretiveness made digital coins a desirable target.
Inadequate security at the exchanges made theft too lucrative to pass up.

The investor outcry played into the hands of regulators. They want to curb cryptocurrency adoption now before it becomes widely adopted. Governments would prefer to be the only entities that can create money.

Closing the exchanges would undoubtedly make it more difficult for nationals to hold digital coins. However, removing anonymity would be an even more significant deterrent.

Earlier in the week, Choi Jong-ku, chairman of South Korea’s Financial Services Commission, said his agency would work with the Financial Supervisory Service to step-up bank inspections. The focus will be record-keeping.

Many of Korea’s largest banks have permitted anonymous accounts. Choi believes these policies make it too easy for criminals to run investor scams, launder money and jack up prices.

For the past two months, another agency, the Finance Ministry, has been crafting a solution. That is, to levy a tax on smaller digital-coin speculators.

Regarding daily trading volume, it’s a market already as large as the Kosdaq, the national small-cap stock exchange. And the rapid price rise of popular digital coins means many South Koreans have plenty of capital gains.

At least, they did …

At the session low Thursday, Bitcoin traded to $12,994. That is down 32% from a month ago when the cryptocurrency reached $19,343. The Ripple XRP crashed to $1.62. It is down 57% from its high at $3.84, last week. And that is despite signing a deal to work with MoneyGram International (MGI) on payments.

If the volatility in cryptocurrencies seems out-of-hand, it is. But investors should expect more. 

Until recently, governments and central banks were the only currency game in town. It’s lucrative. They are not going to give it up without a big fight. That means many more cryptocurrency attacks are incoming.

Much of the near-term digital-coin activity is divorced from reality. However, the underlying idea is sound.

Currency is about trust. Cryptocurrencies remove the need for trust from the equation.

That is the inherent value. And it is real.

Best wishes,
Jon Markman

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Comments 2

  1. Allen January 13, 2018

    Jon, you say that the cryptocurrencies are all about trust. You don’t know who is behind it, where they are, how it is done, nor is it widely accepted in trade. Its value appears to resemble a 3rd world currency. It is hackable and governments can ban it or tax it. It actually appears to be a Ponzi scheme and a fad. You can make money with a Ponzi scheme if you are first in and first out. The last guy out loses all. Where does the trust come from?

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  2. Reasonable Truth January 16, 2018

    Blockchain technology has value and can be suited for Digital Assets, notice I said Digital Assets. Decentralized cryptocurrency, differrent than a Digital Asset, visibly shows major issues to scale and perform multi-million of transactions across the blockchain. Failures to transact are highly visible and noticeable just look at Etherum as a prime example but most are not willing to openly notice it. In the end there must be a form of centralization with transparency to be efficient and show real long-term sustainability. It is now obvious as we have seen with Ether, Bitcoin and others the fundamental ability to scale globally, is just not there. The more you decentralize the more the systems take time to gain consensus and realize transactions with real time expectations. Peer to Peer buyer/seller instances are easily performed, but any matrix of multitudes of dependent element transactions are seeing choke points and grid-locking. Simply put, Crypto is going to have to fundamentally change the underlining technology to scale and deliver real business value that will sustain long-term growth and be able to easily process more than 300 Million daily transactions in milliseconds. Also, I foresee a centralized transparent mining if Crypto is to survive as well. Mining to give rewards that come out of the value of real business is just nonsense and causes inflation of the value. Time to see fiat emerge into a digital asset that can openly be transacted with transparency across the world. A Blockchain Centralized model can be adapted to manage this and reduce cost while offering the future for new economies. This year certainly there should be a clear and present regulatory requirements for all cryptos related entities to follow general accounting guideline and provide their coin or asset holder with independently verified use of funds. This should include exchanges. It is just too easy for the Tether like failures, argue what you want, to emerge. Standards across the industry should and need to be applied as it is too easy for issues to arise like piping or companies just over inflating the price or cooking the books. I am a proponent of Blockchain technology but where it makes sense and is efficient and transparent.

    Reasonable Truth

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