On Friday, the South Korean financial regulator announced that the country was banning Initial Coin Offerings (ICOs), saying that “raising funds through ICOs seem to be on the rise globally, and our assessment is that ICOs are increasing in South Korea as well.”
While there is nothing inherently dastardly or deceitful about ICOs, governments and regulatory institutions around the world have been turning a critical eye toward them in recent months. The truth is that ICOs have disrupted the businesses of crowdfunding and venture capital in a serious way, but there are serious risks involved.
There have been no shortage of “pump-and-dump” scams that promise buyers unbelievable returns. In a landscape where extremely high returns are a serious possibility, it can be difficult for the average investor to distinguish between a promising coin with solid technology and a scam. Plenty of investors have been seriously burned. In all likelihood, many more will also be burned in the future.
First China, Now South Korea
South Korea’s announcement comes just after China’s roll-out of crypto regulations that sent cryptocurrency markets into a temporary tailspin. In fact, South Korea’s cryptocurrency trading volume surpassed China’s for the first time just last week as the former crypto giant sank below the waves of the Chinese regulatory sea.
China has now effectively banned the trading of cryptocurrency, but its regulatory stance started with the announcement that the country was banning ICOs in early September.
Despite the similarities of announcement with some of China’s behavior, it seems rather unlikely that any further regulations that South Korea places on cryptocurrency will be as dramatic or as sudden as China’s. That being said, South Korea’s decision to regulate does come at a time of a global push to regulate the sale of cryptocurrencies.
Japan has been at the helm of the cryptocurrency regulatory front with what is arguably a much healthier and realistic approach to the regulation of cryptocurrency.
In April, Japan country passed its Virtual Currency Act, which put laws into place that required cryptocurrency exchanges to comply with a series of safety measures and to register with the Japanese government. The Japanese government issued regulatory licenses to eleven cryptocurrency exchanges earlier this week.
Proposed cryptocurrency regulations are slowly making their way through the legal systems of the European Union, the United States, India, and several other countries around the world.
Facing the Consequences of China’s Legal Drama
In the short term, China’s cryptocurrency regulations have had a negative effect on the valuation of cryptocurrency in general, although it can be argued that the elimination of some of the manipulative trading practices that were reportedly coming out of China is a good thing for cryptocurrency in the long-term sense.
As of now, the markets are still recovering from the hits they took during the Chinese regulatory drama; in early September, Bitcoin was trading at nearly US$5000; it has since shrunk to around US$4300, up from its mid-September low of just below US$3000.
In general, however, government regulation (and, indirectly, legitimization) of cryptocurrency tends to have a net positive effect on both the valuation of cryptocurrency and the general stability of cryptocurrency markets and exchanges.
The regulations provide a sense of security for individuals and institutions that may have been enticed by the high potential for profits from cryptocurrency but refrained because of the lack of legal protections surrounding cryptocurrency.
For example, many analysts credit the massive jump in the value of Bitcoin and Ethereum to the passage of the aforementioned Japanese Virtual Currency Act. After the act was passed, Ethereum underwent a nearly eight-fold increase in value; it has since fluctuated substantially, but has for the most part managed to maintain a bullish trend. Bitcoin experienced a similar increase.