Sizzling Crypto Market Invites Regulators’ Attention
Runaway trends in the price of cryptocurrencies have brought them under the regulators' scanner in several countries, clouding the outlook for what was touted as the next big thing after Internet. South Korea and China, which are among the most active markets for cryptocurrencies, are leading the list of countries that are initiating crackdown measures.
Latest on the regulation front was an announcement by South Korea on Thursday that the justice ministry is planning a legislation to curb the excessive speculation in the cryptocurrency market. The measures include a ban on all cryptocurrency exchanges in the country, thus effectively preventing trading in digital currencies.
"We have great concerns about virtual currency," Justice Minister Park Sang-ki said at a press conference. The ministry was preparing legislation that bans any transactions based on virtual currencies via exchanges, he added.
The price of Bitcoin plunged as much as 14 per cent to below $13,000 following the news. As of 8.06 am ET, Bitcoin was down 0.49 percent at $13.877.64 on coinbase.
The total market cap of crypto currencies fell to $628.38 billion early Thursday, which was roughly $100 billion less than the level at the same time on Wednesday. Market cap recovered to $683.44 billion as of 8.13 a.m. ET.
There were also reports this week suggesting that Chinese authorities have stepped up their clampdown on crypto currencies. A multi-agency task force, apparently including the People's Bank of China, has asked provincial governments to 'guide' companies in their regions to shutdown crypto currency mining activities, reports said citing various sources.
Mining is the process using which new bitcoins are created by a competitive and decentralized process by individuals or groups of individuals using freely available special software to solve mathematical problems to verify and confirm each bitcoin transaction in a block.
Verified blocks are entered into the 'blockcha in' for others to accept. The first miner to solve the mathematical puzzle will receive new bitcoins as reward. But, Bitcoin mining is an expensive process requiring high processor speeds, time, and intensive use of electricity.
China mines more than three quarters of world's bitcoins as the country provides cheap electricity in several regions, and has a cooler climate that favors cryptocurrency mining.
In September last year, China had ordered a closure of bitcoin exchanges and banned initial coin offerings, or ICOs, a crypto-equivalent for the initial public offerings of shares.
While the Chinese Government makes huge investments in new era technology and wants to project the country as a hub for artificial intelligence and robotics, going forward, it seems not very interested in promoting crypt ocurrencies.
One main concern China has about digital currencies is that these are decentralized and cannot be regulated. The government is also worried about the huge financial risks such a boom entails.
In South Korea, the government has been voicing concerns over the past several months as the cryptocurrency surge gained steam despite severe falls in between.
The country has witnessed intense interest in cryptocurrencies such as Bitcoin, and several crypto exchanges are located there. Prices of cryptocurrencies in the South Korean market tend to be much higher than elsewhere, reportedly over 40 per cent, as buyers exceed those willing to sell.
"Cryptocurrency trading has started to resemble gambling and speculation," Park said. The minister said foreign investors are considering the Korean trade in virtual currencies as abnormal due to the excessive prices relative to other markets across the world, a gap that is dubbed the 'Kimchi premium', in an allusion to the famous Korean dish of spicy pickled cabbage.
Different Korean market regulators have initiated a joint effort to curb the unbridled trading in cryptocurrencies.
At the start of the week, South Korea's Financial Intelligence Unit and Financial Services Commission launched a probe into six commercial banks, which were offering trading accounts to crytpocurrency exchanges in the country.
Joint inspections were planned for Woori Bank, Kookmin Bank, Shinhan Bank, NongHyup Bank, Industrial Bank of Korea and Korea Development Bank from Monday through Thursday.
Officials said they wanted to check whether these banks complied with their anti-money laundering obligations in their transactions with cryptocurrency exchanges. They also wanted to inspect whether the banks have implemented appropriate measures to verify their customers' identification in regard with cryptocurrency trading.
"Cryptocurrencies are highly likely to be used as a means to money laundering due to their nature of anonymity and non-face-to-face transaction," the FSC said.
Authorities hope that a shutdown of crytptocurrency exchanges would minimize side effects of cryptocurrency trading such as fraud using cryptocurrencies, cyber hacks on cryptocurrency exchanges, and irrationally overheated speculation.
As the so-called 'virtual accounts' offered to cryptocurrency exchanges were making it more difficult to identify real names of account holders, the country is implementing new rules that will require real-name cryptocurrency transactions, starting 20 January.
Leading digital currency exchanges, Bithumb and Coinone, confirmed on Thursday that tax authorities had visited their offices.
The number of accounts linked to cryptocurrency exchanges totaled 111 with a combined deposit value estimated around 2 trillion won or $1.8 billion, Yonhap, a South Korean news agency, reported. More than 2 million Koreans own digital currencies.
Late December, the South Korean Government had said that it was planning to implement special measures to curb speculation in the virtual currency market.
The country has sought deeper co-operation with regulators in China and Japan in curbing intense speculation in cryptocurrencies.
Virtual currencies have been around for nearly a decade with the Bitcoin, the largest digital currency in value that transacts on the blockchain network, emerging in 2009. Over the years, several new avatars of crytpocurrencies came into view such as Ether that works on the Ethereum protocol, and Ripple that run on the RippleNet payment system.
In its initial years, crypto currencies, mainly Bitcoin, were seen as something reserved for geeks and tech junkies. Later, its emerged as a darling of the darknet, thanks to the perceived anonymity assigned to it.It is the recent surge in prices of crypto currencies that caught the attention of regulators whose main fear is that an asset bubble is looming.
Billionaire investor Warren Buffett, who is the chairman and CEO of Berkshire Hathaway, has warned that cryptocurrencies are set to have a bad ending and he would not bet any money on them.Whether or not the crypto currencies survive the crash and boom cycle, businesses and investors are confident that their underlying distributed ledger technology called block chain, would ride out the storm to emerge as the next big thing.
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