A rising storm of cryptocurrency interest in South Korea has not only pushed local Bitcoin prices above US$70,000 — a whopping 21% premium over BTC prices everywhere else in the world — but the rumored New York Stock Exchange (NYSE) public listing of Dunamu, the parent company of one of the nation’s top crypto exchanges Upbit, is also generating spikes in prices for its shareholders. 

Kakao, South Korea’s internet giant that has 8.1% equity in Dunamu, saw its share prices rise by 8% as of yesterday’s market closure, while another 8% owner Woori Capital’s shares rose by 16%. Atinum Investment, which owns 7%, saw its shares increase by 10%, and Hanhwa Investments, which acquired 6.5% of Dunamu from Qualcomm in February this year, also had a 27% increase in share prices. 

Although Dunamu’s Upbit — which dominates 20.68% of the world’s total fiat exchange volume, following Coinbase’s 21.56% — has been shopping around the world for a potential public listing, the company says it is still exploring different possibilities. 

“It’s not like we’re waiting for a specific timing to make the announcement, it’s that we haven’t decided whether we are planning to list or not,” a Dunamu spokesperson told Forkast.News. “We are exploring all possibilities for the company’s growth, but we haven’t made a decision. 

On top of surging share prices of Bitcoin’s proxy investors, a listing from Dunamu can have an “explosive effect” on the country’s cryptocurrency market, said Park Sung Jun, the director of Dongguk University’s Blockchain Research Center.

“Most Koreans have a negative perception towards cryptocurrencies,” Park told Forkast.News. “But if Dunamu were to go public in the U.S., then people will realize that cryptocurrencies are not just scams or bubbles, and it can change the Korean perception of cryptocurrencies.”

Park also notes that the perceptions that cryptocurrencies are associated with scams have also been shifting with the wave of institutional investors jumping into Bitcoin and crypto overseas. 

Recently, South Korea’s Financial Services Commission (FSC) — the nation’s financial watchdog — reported that reported crypto-related scams in 2019 accounted for 49.5% of the nation’s phishing scams, which has decreased to 26% in 2020. 

But despite crypto’s increasing popularity and more favorable public image, the South Korean government hasn’t flinched on its rock-solid anti-crypto stance. 

Korean government’s anti-crypto stance

The revised Act on Reporting and Use of Specified Financial Transaction Information, which came into effect on March 25, gives cryptocurrency exchanges six months to apply for a virtual asset service provider license with the FSC, the nation’s financial watchdog, or be shut down. 

Under the new mandate, VASPs must set up a real-name verification account with an approved South Korean bank, as well as obtain an Information Security Management System (ISMS) certificate. 

“It could be seen that the new regulations legitimize crypto exchanges as registered businesses,” attorney Tae Eon Koo of Law Lin told Forkast.News. “But we’ll have to see how the government handles the applications, depending on whether they approve these applications or not.”

Foreign exchanges have started to stop doing business in South Korea rather than comply with the strict requirements. OKEx has recently announced that it will shut its operations in the country, following the footsteps of Binance which also halted South Korean operations earlier this year. 

“No exchanges in the country have submitted an application for a license yet,” an FSC official confirmed to Forkast.News. “They have until September 24th to do so.” 

Only four exchanges in South Korea have successfully set up real-name verification accounts with banks, which streamlines know-your-customer (KYC) requirements for exchanges. Cryptocurrency exchanges Bithumb and Coinone’s partnership with legacy banks such as Nonghyup Bank and Korbit’s partnership with Shinhan Bank have put them in South Korea’s regulatory safe zone for now. 

Last June, Upbit ditched its former account provider Industrial Bank of Korea for K-Bank, an online bank that is majority owned by the nation’s largest telecommunications company, KT Corporation. 

“We haven’t applied yet,” the Dunamu spokesperson said. “We plan to apply as we finalize our preparations and haven’t decided on a particular date for our application”

Dunamu’s latest data on the total number of Upbit crypto account applications increased by 43% from 3 million from last October to 4.3 million as of February’s end, according to Dunamu’s spokesperson. Number of active accounts in Upbit is reported to be 3.2 million 

Aside from these four exchanges — which Koreans call the “Big Four” — there aren’t many others in the country. There are high barriers to entry for private cryptocurrency exchanges in South Korea, as bank cooperation is a requirement to set up a business in the country. 

“When privates come into a bank to establish a cryptocurrency exchange, banks are reluctant to lend a helping hand,” Park said. “The law is structured so banks shoulder the responsibility if something were to happen which actually worsens the cryptocurrency ecosystem in our country.”

But Koo, the attorney, sees that the new mandate could also show a shift in government stance against crypto. “It could be seen that the new regulations legitimize crypto exchanges as registered businesses,” he said.

Kimchi premium 2.0

The phenomenon of a “kimchi premium” was observed in South Korea in late 2017, toward the tail end of the initial coin offering (ICO) boom, when the price of Bitcoin on South Korean exchanges were trading for higher than the rest of the world.

Aside from the nation’s love for gambling — despite laws that prohibit Korean nationals from entering local casinos — increasingly strict cryptocurrency regulations in neighboring China also contributed to the rising Bitcoin prices on Korean exchanges. 

After China banned ICOs and began cracking down on cryptocurrency exchanges in 2017, neighboring South Korea became a popular destination for Bitcoin holders to sell Bitcoin as prices were higher in the Korean market. From January 2016 to February 2018, the average Bitcoin price in Korea was 4.73% higher than global prices, peaking at 54.48% in January of 2018

South Korea has since banned foreigners from opening accounts with local exchanges, while foreign exchanges do not support KRW pairings — those that currently do must also apply for licenses, or shut down operations like Binance and OKEx. 

Investors who are looking to purchase Bitcoin from foreign exchanges with other fiat pairings such as the U.S. dollar could also be subject to arbitrage trading regulations under the Foreign Exchange Transactions Act, which could lead to prison time of up to three years.. 

The hurdles that have been put in place by the government to curb investors leveraging local crypto exchanges for arbitrage and profits appears to be  leading to the second coming of the “kimchi premium.”

“The infrastructure for foreigners to bring Bitcoin into the exchanges and for our nationals to buy foreign bitcoin has not been established,” Park said. “So you can see it as supply being limited in Korea while demand continues to surge in our market, which can create a phenomenon such as kimchi premium.”

Another factor that could be contributing to South Korea’s surging demand for cryptocurrency could be the nation’s unemployment rate, which hit a 21-year high in January, from 4.5% in December to 5.4% in January, because of the Covid-19 pandemic, along with a manufacturing industry that continues to struggle. “Aside from a few internet giants, there aren’t many options for stock traders to invest in,” Koo said. “Compared to the stock market, investing in digital assets could be more attractive nowadays. 

On the other hand, Bank of Korea governor Lee Ju-yeol doesn’t expect this rendition of kimchi premium to last. In a recent press conference, Lee predicted Bitcoin demand would decrease when central bank digital currencies hit the market. Bank of Korea is targeting the second half of this year to test its own digital won pilot.