The popularity of digital assets and distributed ledger technology (DLT) is rapidly gaining momentum in South Korea. While representatives of the national postal service ask the heads of the investment bank Goldman Sachs to share their knowledge and skills in the field of virtual money, the Korea Federation of Banks (KFB) is introducing the customer ID verification platform BankSign powered by the Samsung SDS DLT technology.
Not only business, but the government as well is interested in innovative technologies. Investment Advisor of JPM Asset Management Harris SHIM notes: “Korea is trying hard to improve the digital economy. There is even a ministry of Startups and SMEs and 4th industrial revolution committee, a government taskforce that is specifically formed to improve the digital economy.”
In 2019 the government plans to invest $4,4 bln into the IT sector development, including DLT and artificial intelligence (AI), as a part of the investment program until 2023. The initiative is expected to accelerate the modernization process of the country's economy, as well as to increase the number of qualified IT professionals and reduce the overall unemployment rate, which reached its maximum in August for the period since 2010 - 4,2%. Meanwhile the youth unemployment rate amounted to 9,2%.
The government of South Korea is clearly concerned about the unemployment issue. In August the total number of unemployed people exceeded 1 mln, which earns the 14th place for Korea in an unemployment rate among other countries. Meanwhile, the number of employed declined by 12 thousand to 26.721 mln. Such weak statistics undermine people's trust to the economic program of the President Moon Jae-In, whose approval rating fell below 50% last week for the first time since the election.
The first six-month course in DLT has already been launched by the Korean state institutions, the Ministry of Science and Technology and the Korean Standards Association (KSA), in collaboration with the Hong Kong-based startup Waltonchain. The course holders invested $90 mln in the education of 42 students. The project will help graduates find a job, support startup launches and will give the basis for a healthy DLT ecosystem in general.
Moreover, there planned to be a hackathon organised in November where participants are to offer new developments and options of utilizing DLT. Sophia Yoojin CHOI, member of the Blockchain Seoul 2018 Summit Committee, notes the growing demand for IT specialists: ”The maintenance and development of the software that underpins the day to day operations of disruptive new firms requires specific expertise. The technologies in this area are advancing quicker than engineers are able to learn how to develop them. As such, there are not enough people with the requisite skills to fill the growing number of vacancies.”
Small Korean regions, such as the Gyeongsangbuk-do province have been thoroughly studying the issue of introducing a digital financial system in order to revive their local economy. The province plans to replace current city-issued gift certificates secured by fiat money with its own virtual currency. Residents will be able to make payments using this asset by scanning the QR code, and traders will get an opportunity to conduct transactions on the new digital platform.
What is more, small regions have to cope with the high rate of youth outflow caused by the lack of creative regional cultural contents. Young people leave their homes for better work and life, it results in a lack of vitality and workforce and an aging society, which trigger the economic crisis. The use of DLT technology will allow its users to create, store and share innovative ideas, and hence the virtual currency will be the means to transfer and receive this vital information.
Another province of Jeju is also proactively working on the idea of digitizing its economy and now asking the government to provide it with the status of a technology hub for global DLT projects. The island with a high degree of the administrative autonomy is apparently striving to compete with Malta - another island that has become one of the world's digital centres. The province governor Won Hee-ryong believes that it is necessary to develop international standards and rules for the circulation of electronic coins, in accordance with which local and foreign IT companies will be able to run their businesses in the region. The digital valley status of the island will create more than 1,600 jobs, develop the province infrastructure and fuel the local budget with tax revenues. The representative of the DLT-based asset management company, Chenny LIM, marks that:"If it is formally approved by the Korean government, it will be a turning-point for Korean blockchain industry.”
There are real chances that the island will have the requested status since in the end of August Korean legislators again returned to the issue of legalizing the initial digital coin offering which has been banned since autumn 2017. The main “pro” argument may be the tax revenues from innovative projects, which would contribute to the reduction of the government budget deficit. In June 2018, this index amounted to 3.520 bln won - more than $3 bln.
Bithumb, the largest Korean and 5th in the world, digital exchange with a daily turnover of over $376 million (according to Coinmarketcap on 14th of September) paid another tax bill for $28 mln in mid-April. The same month the exchange made an announcement about its willingness to issue its own Bithumb Coins and offer them initially in Singapore due to the illegality of such a procedure in South Korea. It gives another opportunity to the exchange to generate additional income from a liquid asset, in case if Bithumb prepares the exchange pairs of BTHB with other digital currencies and creates the requisite infrastructure. Thus, in 2017 the company's net profit amounted to 427.2 bln won, exceeding 171 times more over the figure of 2016.
At the time of writing, the exchange has not issued a coin yet, but if it is done in another country, it can only strengthen the domino effect, which is already occurring on the Korean market as digital projects go abroad and hold their primary sale of virtual assets there. For example, another Korean DLT project ICON did not wait for the changes in the regulation policy and issued its virtual currency ICX in Switzerland, raising more than $42 mln. If we assume that the initial coins sale is under the corporate tax, which was 22% in 2017 (the year ICX completed the initial sale), the Korean budget has missed about $9 mln. In addition, the Hyundai Group subsidiary company, Hdac BS&C, also went to Switzerland to make an offer of its virtual currency, where it managed to raise $20 mln and as a result more than $4 mln also passed by the Korean budget.
Such a great tax shortage cannot but irritate the government’s nerves. Back in spring the National Assembly advocated the legalization of the initial coin placement. The initiative was supported by the 4th industrial revolution Committee, recommending the authorities to form a task force of private investors and officials to improve the transparency of the digital asset market.
The final decision on behalf of the government is only expected as it has been postponed due to several reasons. First of all, the virtual currency has not received a legal definition yet. However, on the 30th of May the Supreme Court of South Korea decided to confiscate 191 bitcoins from cybercriminals. Thus digital assets can now be considered as property of value, at least in proceeding criminal cases. It can be the first step in determining the status of electronic money in the country.
Secondly, the registration system for virtual currencies offering requires comprehensive study in order to reduce the risk of fraudulent schemes. Ponzi schemes are widespread in Asia, including South Korea. For instance, on the 19th of April the South Korean Court of the Incheon city convicted two persons, who organized the bitcoin pyramid. The criminals registered the company in the Philippines and stole more than $24 mln of investments, assuring investors with extraordinary high profits. Therefore, the main financial regulator of South Korea, the Financial Services Commission (FSC) set the investors security and their protection from financial pyramids as a priority. In order to solve the problem, Korea may decide to implement the US model, where projects which strive to attract investment through the placement of virtual currencies must be accredited by the SEC and regularly audited.
It should be emphasized that the authorities have been actively fighting against another type of fraud - hacker attacks on digital exchanges - imposing the stringent KYC rules (“know your customer”). During registration on the digital exchanges, investors must provide real data that matches those specified for bank accounts. Already registered traders are also required to provide valid information in order to continue trading on the exchanges. All anonymous accounts are blocked. In addition, the FSC has issued a guide for exchanges to anticipate money laundering. The regulator suggests to suspect and examine all the accounts that make transactions of more than 10 mln won per day or 20 mln won per week.
On the 11th of September it was announced that the KYC rules should be observed by the banking sector as well. Banks are obliged to limit or completely suspend the service to customers who have not provided full information about their accounts in digital currencies.
The South Korean exchanges have been struggling from hacking, especially in June, when scammers managed to steal digital assets in the amount of $71 mln - Coinrail got robbed first for $40 mln and then the giant Bithumb was scammed for another $31 mln. World statistics are impressive: only in the first half of 2018 $1,1 bln was stolen.
Finally, the most important question - taxation - remains open. The authorities have not yet provided tax legislation for the digital asset market. According to the anonymous source of The Korea Times from the government, the various options for the imposition of VAT, capital gains tax or both on trade, and collecting of corporate income tax from the exchanges are discussed. He adds that, “allowing ICOs should involve local banks, the justice and finance ministries, and the tax agency to create transparency. This will allow the government to track the history of capital inflow into ICOs”. Perhaps we will get some up-date on this issue at the upcoming summit in Seoul.
While we are waiting, it should be pointed out that despite of rather aggressive approach to the digital asset market by regulators, South Korea is showing a great interest in new technologies and developing options for their implementation to solve existing economic problems.
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