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South Korea goes nuclear on cryptocurrencies

An FAQ on what just happened so people think you know what you’re talking about

South Korea's central government building.

You can’t tell from this picture but South Korea’s government is frowning on cryptocurrencies (source: Wikipedia)

Thursday was a brutal day for cryptocurrencies and many new investors were no doubt sweating bullets as they checked their trading accounts.

Hopefully, this FAQ will help.

What happened?

South Korea’s justice minister, Park Sang-ki, said in a press conference that the government was, “basically preparing a bill to ban cryptocurrency trading through exchanges,” according to Reuters and several other media outlets. This comes after it was reported that the South Korean tax authorities and police paid a visit to the country’s largest cryptocurrency exchanges, including Coinone and Bithumb.

Whoa! Why are they so much against cryptocurrencies?

Two big reasons: The government is trying to crack down on crime and it’s worried that cryptocurrency trading is leading to a bubble that could expose novice investors.

Are these two things related or is it just a coincidence?

There might be some relationship between the two. The government fears criminals are using cryptocurrencies to launder money. South Korean exchanges make it relatively easy for, say, housewives and college kids to open accounts and trade (those examples, by the way, are frequently cited as growing investors in the country’s cryptocurrency markets) and they’ve been heating up the cryptocurrency markets there.

What’s wrong with that?

Lax rules also means it’s easy for people to pay and receive large amounts of money for illegal activities incognito using bitcoin or litecoin or whatever. Thus a couple of weeks ago, South Korea banned the exchanges from opening up anonymous accounts.

I just read the article you just linked to and it said the South Korean government was talking about closing cryptocurrency exchanges two weeks ago. How is it different this time?

Basically, it’s not. They’re just saying it again but nobody likes to hear bad news twice.

So if the Justice ministry said it twice, do they have to say it a third time for it to become law? You know, like, “Beetlejuice” or “There’s no place like home”?

Not at all. A law has to be drafted and passed by the National Assembly. That could take months or years if it ever comes to a vote. In the meantime, legislators could face pressure from novice investors who want to keep the party going.

If a national legislature thinks it’s a Ponzi scheme with criminal undertones, why wouldn’t it stop it right now?

Take a look at Albania in the 1990s, when the country was plunged into violent chaos because a sizable chunk of the economy was tied to Ponzi schemes that collapsed. Do you think any elected official wants to be responsible for precipitating that?

Okay, so why do I hear about South Korean exchanges and CoinMarketCap? What’s the story there?

It’s also sorta related. On Tuesday, CoinMarketCap, the go-to site for keep track of the relative value of cryptocurrencies, decided to remove South Korean exchanges from how it calculates market averages.

That sent cryptos like Ripple’s XRP plunging 30 percent.

But if those are the prices cryptocurrencies change hands in some places, shouldn’t they be factored into an average?

Good question. The counter argument is that South Korea is an overly inflated bubble being pumped up by housewives, their kids, and their kids’ drug dealers and not by real market forces.

You mean supply and demand?

Indeed.

So if a lot of criminals all of a sudden demand barrels of oil or gold bullion, wouldn’t that raise the prices on the exchanges?

Yes.

And didn’t South Korea account for about a fifth of all bitcoin trades even though its entire economy is less than 2 percent of the world’s GDP?

Yes.

So isn’t that all a part of supply and demand given that arbitrage would keep prices in line after costs are factored in?

Stop asking questions.

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.