The clampdown in South Korea, a crucial source of global demand for cryptocurrency, comes as policymakers around the world struggle to regulate an asset whose value has skyrocketed over the last year.

Men talk in front of an electric board showing exchange rates of various cryptocurrencies at Bithumb cryptocurrencies exchange in Seoul, South Korea on January 11, 2018.
Men talk in front of an electric board showing exchange rates of various cryptocurrencies at Bithumb cryptocurrencies exchange in Seoul, South Korea on January 11, 2018. (Reuters)

The South Korean government on Thursday said it plans to ban cryptocurrency trading, sending bitcoin prices plummeting and throwing the virtual coin market into turmoil as the nation's police and tax authorities raided local exchanges on alleged tax evasion. 

The clampdown in South Korea, a crucial source of global demand for cryptocurrency, came as policymakers around the world struggled to regulate an asset whose value has skyrocketed over the last year.

Earlier on Thursday, the minister, Park Sang-ki, said the government was preparing a bill to ban trading of the virtual currency on domestic exchanges.

"There are great concerns regarding virtual currencies and justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges," said Park at a press conference, according to the ministry's press office.

But South Korea’s presidential office had later said the ban had not yet been finalised.

“Justice Minister Park’s comments related to shutdown of cryptocurrency exchanges is one of the measures prepared by the Ministry of Justice, but it’s not a measure that has been finalised,” a spokesman told reporters in a text message.

A press official said the proposed ban on cryptocurrency trading was announced after "enough discussion" with other government agencies including the nation's finance ministry and financial regulators.

Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.

The government's tough stance triggered a sell-off of the cryptocurrency on both local and offshore exchanges.

The local price of bitcoin plunged as much as 21 percent in midday trade to $17,064.53 (18.3 million won)  after the minister's comments. It still trades at around a 30 percent premium compared to other countries.

Once enforced, South Korea's ban "will make trading difficult here, but not impossible," said Mun Chong-hyun, chief analyst at EST Security.

"Keen traders, especially hackers, will find it tough to cash out their gains from virtual coin investments in Korea but they can go overseas, for example Japan," Mun said.

Indeed, bitcoin's 1,500 percent surge last year has stoked huge demand for cryptocurrency in South Korea, drawing college students to housewives and sparking worries of a gambling addiction.

"Some officials are pushing for stronger and stronger regulations because they only see more (investors) jumping in, not out," Park said.

By Thursday afternoon, the Justice Ministry’s announcement had prompted more than 55,000 South Koreans to join a petition asking the presidential Blue House to halt the crackdown on the virtual currency, making the Blue House website intermittently unavailable due to heavy traffic, the website showed.

Regulatory conundum

There are more than a dozen cryptocurrency exchanges in South Korea, according to Korea Blockchain Industry Association. The proliferation of the virtual currency and the accompanying trading frenzy have raised eyebrows among regulators globally, though many central banks have refrained from supervising cryptocurrencies themselves.

The news on South Korea's proposed ban came as authorities tightened their grip on some of the cryptocurrency exchanges.

The nation's largest cryptocurrency exchanges like Coinone and Bithumb were raided by police and tax agencies this week for alleged tax evasion. The raids follow moves by the finance ministry to identify ways to tax the market that has become as big as the nation's small-cap Kosdaq index in terms of daily trading volume.

Some investors appeared to have taken preemptive action.

Bitcoin sank on Monday after website CoinMarketCap removed prices from South Korean exchanges, because coins were trading at a premium of about 30 percent in Asia's fourth-largest economy. That created confusion and triggered a broad selloff among investors.

An official at Coinone  said that a few officials from the National Tax Service raided the company's office this week. The official, who spoke on condition of anonymity, said that Coinone was co-operating with the investigation.

Bithumb, the second largest virtual currency operator in South Korea, was also raided by the tax authorities on Wednesday.

"We were asked by the tax officials to disclose paperwork," an official at Bithumb said, requesting anonymity due to the sensitivity of the issue.

The nation's tax office and police declined to confirm whether they raided the local exchanges.

South Korean financial authorities had previously said they are inspecting six local banks that offer virtual currency accounts to institutions, amid concerns the increasing use of such assets could lead to a surge in crime.

Source: Reuters