What Should Be Done?
As virtual currency speculation has spread like wild fire among Korean people, the number of those who invested in virtual currencies and suffered loss is on the rise. A typical example is a sharp rise and fall in the value of Bitcoin Cash on November 12. The Bitcoin Cash, which traded at 1,069,200 won (US$960) at 3:50 pm on November 11, rose to 2,839,700 won (US$2,550) 24 hours later at 3:50 pm on November 12 on the coattails of a hard fork (the issuance of new virtual money to enhance the value of virtual currencies).
As the exchange website was crowded with too many users, Bithumb's server broke down, and when the server resumed to normal operation after one hour and 50 minutes, the market price dropped to the 1.6 million won level (US$1,440). Many investors said that they suffered huge loss. The Bitcoin Cash seldom recovered and continued to go downhill. As of 4 pm on November 17, Bitcoin Cash is trading at the level of 1.2 million won (US$1,080).
Of course, some people hit the jackpot. A 32-year-old person surnamed “Park” bought 22 Bitcoins with 10 million won (US$9,000) in bonuses and fund income at the beginning of last year. "I forgot about the 22 Bitcoins for a while. Last month, I heard news that Bitcoin’s value was soaring last month. I checked the price of my Bitcoins. The price stood at close to 200 million won (US$180,000)," Park said. "I think that as there are many investors, there are not a few individual investors like me.”
Individual investors began to flock to the Korean virtual currency trading market in earnest in August. Bitcoin, which traded at 3,040,000 won (US$2,730) on August 1, soared to 4,870,000 won (US$4,380) on November 14. The issuance of the hard fork which divides Bitcoin into Bitcoin Cash paid off handsomely. Moreover, it was a change to hold Bitcoin before the hard fork and obtain Bitcoin Cash at the ratio of one to one. Individual investors bought Bitcoin one after another. On August 19, Bithumb's daily trade volume ran to 2.6 trillion won (US$2.3 billion), more than the trading volume in the KOSDAQ market of Korea.
There is also a boom in paid reading rooms (a chat room that explains market conditions of the day and recommends future promising virtual currency items and offerings to paid users). "Reading rooms in KakaoTalk and Telegram may top 100," one virtual currency expert said. “Some reading rooms charge over one million won although admission fees vary."
However, participants say that the virtual currency market is led not by the individual investors but by "pumping forces" acting in groups. The Korean virtual currency trading market where there are no regulations, prices are higher than those at foreign virtual currency exchanges, and individual investors gather, is a sitting duck for overseas pumping forces. Up to ten foreign currency items soar 10% and about ten minutes later, plunged back to the original spot for one day. Once pumping forces sweeps the market, only individual investors lament, saying, “We were taken aback once again.”
Pumping forces are not all foreign forces active in foreign countries. There are also groups such as D.va in Korea. Domestic pumping groups operated with paid members collect a certain number of members and order them to purchase virtual currencies at a time and a date set by the groups. If individual investors see the price shoot up and buy virtual currencies, following pumping groups and the price goes higher, pumping groups sell off all of what they bought.
This kind of things takes place as the Korean virtual currency trading market is not subject to Korean government’s laws and regulations. Unlike the stock market, there is no limit to rises and falls in the value of virtual currencies in the virtual currency trading market. There is no system that can respond to rapidly changing market conditions like circuit breakers and sidecars. So the market changes rapidly by minutes. Damage is done to individual investors.
This is the ongoing situation, but financial authorities are taking no action. "There is no reason to protect investors in virtual currencies which are no more than a speculative means with taxpayers’ money," a government financial official said. However, experts in virtual currency point out that financial authorities’ poor regulations are enhancing the speculative nature of the virtual currency market. "Even though the value of virtual money rises more than 100% a day, financial authorities do not raise a finger, so group and individual investors who scheme to make a big fortune on a single occasion flock to the virtual currency market,” a virtual currency exchange representative said. “It is irresponsible for financial authorities to continue saying, “We have no action to take for the speculative market."
Korea and China Do not Accept Virtual Currencies but Japan Actively Embraces Them
Even though people are flocking to the trade of virtual currencies as Bitcoin and damage is being done, there are ongoing debates over the true nature of virtual currencies and possibilities of utilizing virtual currencies at home and abroad.
"Virtual money has the potential to develop into a means for payment and transaction because it can transfer funds without restrictions caused by physical space, charges low commissions, and can deal with various types of transactions," said Jeong Yu-shin, a professor of Business School at Sogang University.
Most economists in Korea, however, say that it will be a real challenge for virtual money to replace existing currencies. "The origin of currencies was things that could be exchanged with all goods and services," said Ahn Jae-wook, a professor of economics at Kyunghee University. "If a thing like virtual money does not have intrinsic value that can be used for other purposes, the thing is highly unlikely to be used as a currency. Economists believe that virtual currencies’ price volatility is so high that Bitcoin or Ethereum cannot be established as money.
For this reason, the Bank of Korea does not recognize virtual money as a currency. The central bank of Korea regards virtual currencies not as money, but as a speculative means that is traded only in the private sector. That's why the Korean government banned fundraising by way of an initial coin offering (ICO).
Abroad, virtual currency policies are different, depending on countries. Japan is actively embracing virtual money along with Estonia. In April, Japanese financial authorities approved virtual currencies as a legal means of payment, that is, money. At the end of September, 11 virtual currency exchanges were officially approved.
The United States allows a variety of products, but also has tough regulations. The U.S. Commodity Futures Trading Commission (CFTC) approved option trading for LedgerX, a Bitcoin trading platform, in July and is also considering accepting Bitcoin futures within this year. The US Securities and Exchange Commission (SEC) is expected to apply the Securities and Exchange Act to ICOs like IPOs that list existing stocks. Canada defines ICOs as securities. Australia applies some corporate law to ICOs. Israel and the UK are planning to come up with ICO regulations in the near future. In China, virtual currencies themselves are legal, but ICOs are illegal.