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The South Korean Regulator Deprived The Crypto of Tax Benefits

03 October 2018 22:04, UTC
The South Korean Regulator Deprived The Crypto of Tax Benefits
By Anna Zhygalina

Cryptocurrency in South Korea is not banned, and this is a fact. Moreover, the government intends to make regulatory efforts to legitimize the process as much as possible. All sanctions imposed by the state have the aim to protect investors and prevent the money laundering and tax evasion. However, all the laws amendments lead only to the fact that blockchain entrepreneurs are increasingly inclined to conduct ICO abroad, and the regulations are still unclear, including the taxation system of the digital currency itself.

Crypt by or without the rules

Just a year ago, on September 29, the Financial Services Commission (FSC) of South Korea decided to ban ICO in order to "protect investors from fraud". According to the Vice-Chairman of the FSS Kim YONG-BEOM, the “money has been flooded into an unproductive and speculative direction.”

The decision of the South Korean authorities led to a drop in the bitcoin value within a week after the introduction of the ICO ban: the price of BTC decreased by almost 2% (to $4108.9), and ETH - by more than 4% (to $289.5).

And after the next meeting of the International Monetary and Financial Committee (IMFC), on October 14, 2017, South Korea began to facilitate the reforms in regulation and management of cryptocurrency transactions. At the beginning of 2017, the cryptocurrency was not regarded as a cash. As the head of the Department of payment systems and settlements of the Bank of Korea, Cha HYEON-JIN said, "virtual currency is not a monetary or financial product", and bitcoins were traded as goods at that moment. Also, the National Tax service was concerned about the issue of cryptocurrencies taxation, including capital gains tax, as well as value added tax and gift tax.

Rumors that South Korea will levy a tax on the crypt, frightened off many entrepreneurs, but in reality it turned out that the situation looks somewhat different:

"Although there were numerous rumors about the Korean government wanting to levy taxes on crypto trading, we have yet to see this happening. Perhaps the government decided that it is best to impose higher taxes on crypto businesses instead of its people where the latter would deem an unpopular move by Moon's administration. His popularity has already begun to crack due to the recent hike in the minimum wage which caused prices of goods and services to increase while failed to improve job growth" - Melvin WONG, the Chief Global Consultant of Korean Blockchain Entrepreneur Association (KOBEA) said in an exclusive interview for

Soon after, the Financial Services Commission (FSC), together with the Ministry of Science and Information and Communication Technologies announced the local audits of cryptocurrency service providers, including the exchanges. And in January 2018, the Financial Intelligence Service and the Financial Supervision Service (FSS) conducted an audit of the six largest banks that provided virtual bank accounts for the crypto-exchanges. They inspected the implementation of measures to prevent money laundering and tax evasion. Reports of the services showed that the 111 accounts tied to crypto-exchanges were found, with a total amount of about $1.8 billion (about 2 trillion won).

As a reaction to the tough policy was the appeal of the National Assembly of South Korea, which published a report with a recommendation to allow local companies and startups to conduct ICO on may 2018. The document notes that the special Committee of the Assembly accuses the government of neglecting its duty during the innovative technologies spreading and introduction. As well as the ICO ban forced local companies to move to other countries that are more friendly to cryptocurrencies, it had negatively affected the whole economy of South Korea.

Indeed, more than a dozen of major blockchain companies in South Korea have launched their ICO projects abroad since the ban. Among the most famous cases we can name the case of Hyundai BS&C, which has released its own currency Hdac in Switzerland. The co-founder of Governtech and the founder of Paxnet, a major financial information portal, also founded the Foundation and launched an ICO there. South Korean medical companies are increasingly releasing tokens abroad to finance their domestic projects. For example, this way have chosen Zikto, My23 Healthcare and Medibloc, which received investments of $21.2 million.

Throughout the year, the FSC really promised the possibility of lifting the ICO ban after the appropriate regulatory framework would be developed. The responsible for overseeing the sphere of crypto-currencies, Kang YANG SU said that his office has not yet made a final decision on the abolition of the ICO ban in the country: "Indeed, we are thinking about how to stimulate the development of blockchain technologies and effectively regulate cryptotrading best."

"We need to form a task force including private experts in order to improve transparency of cryptocurrency trading and establish a healthy trade order. We will also establish a legal basis for cryptocurrency trading, including permission of ICOs, through the National Assembly Standing Committee" - the Special Committee on the Fourth Industrial Revolution under the National Assembly said.

This Special Committee also urged the South Korean to accelerate the adoption of control measures "to increase the transparency of trading digital currencies, and to establish a healthy order in the market".

Whether the new sanctions will lead to the fact that all enterprises of South Korea will issue their tokens abroad, it remains questionable. However, it becomes clear that the policy of inaction leads rather to losses in the country's budget. As we wrote earlier, the DLT-projects such as ICON and its subsidiary project Hyundai group Hdac BS&C went to Switzerland, without waiting for the new rules in the regulation. Thus, South Korea in 2017 did not get about $13 million from these projects as a potential corporate tax, as so these projects attracted $62 million in the amount, placing their tokens abroad.

Crypto-trading and brokerage companies - the next step

The beginning of this year was marked by a new decision of the Cabinet of Ministers of South Korea. The decision to exclude the company for the sale of digital assets from the classification of the business venture was established on September 27.

Under the Prime Minister Lee NAK-YEON presidency, the government revised the “Enforcement Decree of the Act on Special Measures for the Promotion of Venture Businesses” at this meeting. The Cabinet of Ministers of South Korea announced the following reasons for excluding the cryptocurrency industry: abnormal speculative overheating of the market, financial violations, cases of money laundering and hacking.

Back in August 13, the Ministry of small and medium enterprises (SMEs) and start-UPS of the country (MSS) has already excluded cryptocurrency exchanges from the list of venture capital enterprises, as well as “cryptocurrency trading does not create the added value”. That decision caused a flurry of indignation among the crypto companies and blockchain associations in South Korea, as venture companies in the country are encouraged by significant tax incentives. It was predicted the total fall of the cryptocurrency industry, as many of these companies will have to transfer their business to other countries where the authorities are more loyal to this industry.

The new amendment is a higher legislative step based on the August decision, which aims to "strengthen cooperation with related institutions" to protect citizens from "illegal activities" related to the business of digital assets.

The prime Minister said: "Money laundering and hacking related to blockchain-based digital asset trading and brokerage business are occurring, we will set it as a business sector not to be included in the venture enterprise and form a sound industrial ecosystem”.

All these steps are the evidence of the South Korea government seriously working on the creation of a separate business sector and the legal regulation of cryptocurrency processes, which will apply to all cryptocurrency and brokerage companies. The attack on the South Korean stock exchange Conrail, which has lost more than $30 million as a result, has caused the enhanced control by the Korean Financial Intelligence Unit (KFIU). As we wrote earlier, this case has forced even the representatives of the crypto industry to recognize the need for tougher regulation.

However, not everyone considers a new step in the regulation of cryptocurrencies by the Ministry as a total benefit. Melvin WONG believes that: “This is a significant setback to the cryptocurrency market in Korea but would not affect the blockchain counterpart. Since the venture firm certifications of existing Korean crypto exchanges will expire by end of 2018, it will be appalling to witness the increase in fees to be imposed by these firms from 2019 onwards”.

Government to double financing of blockchain projects

No matter how much crypto-exchanges and blockchain entrepreneurs resist the changes, threatening to leave their Alma mater, the government does not try to pull the plug. The South Korean Ministry of Science and Information Communications Technology (MSICT) promised the large-scale state support to the domestic blockchain industry yet in June.

On September 20, the second Vice-Minister of MSICT Min WON-KI held a meeting with representatives of blockchain startups. There were the problem areas of blockchain business, plans to improve technologies in South Korea and improve their regulation discussed in details. The meeting, marked by the Second Vice Minister as a “frankly speak” with the private sector, was a part of the government's plan to reach out to companies in the 10 key ICT sectors of the Fourth industrial revolution.

The Second Vice Minister of science and ICT said: "Considering the fact that there is no significant blockchain technology gap between South Korea and the other countries, it is a good opportunity for South Korea to lead the industry. The government will actively back domestic companies to help them lead the global blockchain market.”

Among the promising projects there were discussed those, where the blockchain technology is used in customs clearance, agriculture, simple property transactions.

Blockchain entrepreneurs suggested to create a fair competitive environment between domestic and foreign blockchain developers, and the environment for R&D blockchain in the cloud. They also asked the government to provide financial support for research in the private sector.

As we wrote earlier, the MSICT together with the Korean Standards Association (KSA) and the Hong Kong blockchain startup Waltonchain launched a course for $90 million, which should release 42 “gold” blockchain specialists in January. And in November, the government blockchain hackathon will award the teams that will demonstrate the new ways of using this technology.

The investments in blockchain startups will be doubled according to the government strategy: in 2019, the financing of such projects is planned in the amount of $9 million, and the assistance of MSICT will increase proportionally. Under its control, the South Korean Internet and Security Agency (KISA) will increase the number of pilot blockchain projects in the public sector from 6 to 12, and it will also support three private blockchain projects.

Melvin WONG believes that the Korean government will take more precaution towards finding the right balance between regulating and promoting the cryptocurrency industry as it remarks the great perspectives in these growing technologies. And the main complexity of this process the global consultant KOBEA sees in the fact that optimal regulatory framework is difficult to ratify at the moment, as the industry itself is not yet optimized. "Cryptocurrencies are still prone to speculative attacks and its volatility doesn't help either,” - says Mr. WONG. However, according to him, the Ministry of Science and ICT of South Korea actively encourages the development of the crypto market and the introduction of DLT, announcing their commitment to funding over $200 million on blockchain technology: “Thus, I won't be surprised to see more regulations in 2019 while at the same time more initiatives to grow and adopt blockchain technology”.

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