On September 29, South Korea’s financial regulator, the Financial Services Commission (“FSC”), announced its intention to forbid domestic companies from participating in initial coin offerings (https://www.coindesk.com/south-korean-regulator-issues-ico-ban/).
All forms of ICOs will be banned “regardless of technical terminology,” as will margin trading of virtual currencies. The FSC warned of an “intensive crackdown” and “stern penalties” for companies involved in ICOs. However, the FSC did not provide details as to the penalties involved.
The regulator stated that initial coin offerings are “overly speculative and ‘constitute a violation of the capital market law.’” The decision was made after the FSC consulted with the Korean finance ministry, the Bank of Korea, and the National Tax Service (https://www.reuters.com/article/us-southkorea-bitcoin/south-korea-bans-raising-money-through-initial-coin-offerings-idUSKCN1C408N). The decision stemmed from the Korean government’s belief that the use of ICOs as fundraising tools raises the risk of financial scams.
The FSC’s vice chairman, Kim Yong-beom, elaborated on the reasons behind the ban, stating that, “The situation is that people have been channeling money in a very speculative and unproductive direction” (http://english.yonhapnews.co.kr/news/2017/09/29/0200000000AEN20170929005300320.html).
Despite the FSC’s clear intentions, ICOs have not officially been banned as of this time. Instead, the September 29 meeting led to the creation of “a task force to prepare for the ban but set no dates for implementation” (https://www.forbes.com/sites/elaineramirez/2017/10/03/south-korean-startups-are-preparing-for-war-against-ico-ban/#1de237a2868f).
Still, the FSC’s potential ban of ICOs may move deeper into the crypto industry. At the September 29 meeting, the FSC also “resolved to prevent financial companies from getting involved in cryptocurrency transactions, crack down on money laundering, limit crypto accounts to one per person, and strengthen monitoring to prevent crypto-related drug transactions and ‘multilevel business fraud’ -- or Ponzi schemes.”
The FSC’s announcement comes after a number of steps it has recently taken to regulate the crypto industry (https://www.forbes.com/sites/elaineramirez/2017/10/03/south-korean-startups-are-preparing-for-war-against-ico-ban/#54a704b22868). On September 1, it “sought to ban crypto-based issuance of securities and prohibited crypto traders from giving credit grants while establishing a crypto crime task force.” On September 15, “[t]wenty individuals were arrested for ‘multilevel fraud' and similar crimes.” Additionally, “[f]our people were prosecuted after a company called 00 Coin stole 21.2 billion won in scams this year, while five people were prosecuted for selling 1.25 kilograms worth of marijuana via bitcoin since August 2016,” and “[a]nother four people were arrested for scamming 1,000 investors out of 25 billion won through fake cryptocurrency sales through unregistered multilevel companies.”
South Korea’s ban of ICOs follows in the heels of China’s complete ICO ban on September 4, which stated that all ICOs were prohibited as of that date and that any ICOs that were completed previously must refund any crypto assets to investors. A translation of the Chinese ban can be read in full at Coindesk (https://www.coindesk.com/chinas-ico-ban-a-full-translation-of-regulator-remarks/).
South Korean Cryptocurrency Community Organizes to Fight Back
As the FSC’s ban has not been officially implemented yet, leaders and companies in the local crypto industry intend to push back against the prospective ban (https://www.forbes.com/sites/elaineramirez/2017/10/03/south-korean-startups-are-preparing-for-war-against-ico-ban/#54a704b22868).
Kim Tae-Won, CTO of the South Korean company Glosfer, which launched a bitcoin exchange in July, has been organizing the local ICO community to take a stand against the ban through an official government petition by the end of October. Further, a law firm hired by Glosfer “determined that ICOs cannot be penalized under existing laws.”
Kim believes that the FSC’s announcement was rushed. “We’re not even slightly afraid of what has come from the government,” he said. “I can guarantee the final regulation will not look like what the government is proposing.”