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S. Korea’s Central Bank Calls for Monitoring of 'Kimchi Premium' in Cryptocurrency
Due to Price Gaps in Cryptographic Assets
S. Korea’s Central Bank Calls for Monitoring of 'Kimchi Premium' in Cryptocurrency
  • By Yoon Young-sil
  • September 12, 2018, 11:34
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The price gap between domestic and overseas cryptographic assets grew due to the demand of speculations.
The price gap between domestic and overseas cryptographic assets grew due to the demand of speculations.

Major cryptocurrencies could be traded with a massive premium in the South Korean market, central bank officials in South Korea said, calling for careful monitoring of prices.

According to a BOK issue note titled “Background and Implications of Price Gaps between Domestic and Overseas Cryptographic Assets” by the Bank of Korea (BOK) on September 11, the price gaps between domestic and overseas cryptographic assets has currently decreased as the demand of regulations subsided in the market. However, the price gap in the cryptocurrencies can widen further when South Korea sees a similar upsurge in crypto asset demand in the future.”

For bitcoin, one of the top cryptocurrencies, the price of won-denominated crypto assets in US dollar terms from July 2017 to May 2018 was 4.99 percent higher than the average price in the global market and the price gap between South Korea and the world average, expanded more than 40 percent in January this year. On the other hand, the price of US dollar-denominated bitcoin was 0.31 percent lower than the global average over the same period, while that of euro-denominated bitcoin was 0.19 percent lower. The price gaps between domestic and overseas ethereum, ripple and bitcoin cash also widened from December last year to January this year.

The price gap between domestic and overseas cryptographic assets grew due to the demand of speculations. As the global price of bitcoin skyrocketed in December last year, the demand of speculations increased amid growing public interest in cryptographic asset investment.

In fact, the won flooded into domestic cryptocurrency exchanges at that time. When the price of cryptocurrencies in the global market changed, that in South Korea showed a wilder fluctuation before January 2018. This is because South Korean investors actively follow the trend of global prices, according to the report. In other words, the domestic cryptographic asset market is overheated compared to the ones in other countries.

Since individual investors have mostly participated in trading in the cryptographic asset market, rather than financial institutions, the supply couldn’t meet the demand due to limitation in terms of transaction volume and specialty.

Higher transfer fees also grew “kimchi premium,” which refers to the gap in cryptocurrency prices on South Korean exchanges for cryptocurrency assets. For bitcoin, miners fix a transfer fee when users request a transfer. The users have had to pay a higher fee during the period when price gaps at home and abroad widens when the miners asked to do.

The South Korean government have restricted investors from joining foreign exchanges and new investors from domestic exchanges and introduced a real-name system for crypto exchanges to prevent money laundering. Investors also have the limits on the amount of foreign currency remittance under the current Foreign Exchange Transactions Act when they wire money for cryptographic asset transactions. These factors have prevented an elastic increase in the supply of cryptocurrency assets.

However, it is impossible to solve supply factors that restrict cryptographic asset transactions. The real-name system for crypto exchanges was designed to prevent tax evasion and actually eased the overheated speculations. But, it cannot aim to narrow price gaps in cryptographic assets alone considering the initial purpose of introduction. In short, the gap between domestic and overseas cryptographic asset prices can widen whenever the demand surges in the nation.