Authorities have admitted that the South Korean government delayed regulation of cryptocurrencies as it feared consumers would acknowledge it as the government legitimising the emergent market.

Government conscious of the consequences of regulation

Last week, it was reported that the government of South Korea and its financial services are set to regulate cryptocurrency exchanges as they do banks, with stringent policies and regulations.

On June 8th, the Korean Financial Intelligence Unit (KFIU) director Kim Geun-ik confirmed that the government has at last agreed to regulate the cryptocurrency market to prevent cryptocurrencies from being used by criminals to launder money and to limit hacking attacks.

A spokesman said: “Under current regulations, there are clear limitations in preventing money laundering on crypto exchanges because the only way authorities can spot suspicious transactions is through banks. If the bill of lawmaker Jae Yoon-kyung from the Democratic Party of Korea passes, local authorities will be able to impose identical regulations on crypto exchanges that are implemented on commercial banks.”

In September of 2017, a member of the National Assembly Committee told local financial journalists that financial authorities have requested the government to regulate the emerging market to protect investors from malicious actors and lower the possibility of security breaches in the space.

National Assembly Committee member, Park Yong-Jin said: “We are frustrated as well. We fully understand that the government is reluctant towards regulating the cryptocurrency market because it will inevitably lead investors to consider it as the government’s way of legitimizing the market. But, if the government leaves the cryptocurrency market unregulated, it is simply leaving it vulnerable to various issues.”

Before proper regulation could be implemented, a report from major mainstream media outlet Hani indicated that officials like Park have encouraged the government to update its regulatory framework, which at the time absurdly saw exchanges as communication vendors, allowing businesses to operate digital asset platforms with a $30 fee and no license requirement.

So what made South Korea regulate the market?

A report from Hani alleged that Coinrail played a substantial role in convincing the government that proper regulations in the local cryptocurrency market are necessary. Additional investigations in the aftermath of the Coinrail hack showed that most crypto exchanges in South Korea outside of the big three–UPbit, Bithumb, and Korbit–were operating without proper security measures and IT infrastructures.

More significantly, an investigation into Coinrail uncovered numerous suspicious business activities, including the fact that the company was created with a budget of just $10,000. However, it was later revealed that a company called Tobesoft backed Coinrail, purchasing a stake with a valuation of $24 million.

Even at the time of the investment of Tobesoft into Coinrail, it was reported that the company did not have solid infrastructure in place and as of current, it remains uncertain whether Coinrail had a budget of $10,000 and desperately tried to expand its business without investing in its security or a multi-million dollar company was behind it after all and it operated opaquely, deceiving investors.

These highly fishy circumstances surrounding Coinrail and other hacking attacks have breathed an eerie climate throughout the South Korean market for the past two years, which helped in egging the government on with its regulatory changes.

In real terms, this could only mean good news for the budding sector, as whether authorities like it or not, government regulation inadvertently legitimises these emergent financial institutions and concretizes their existence within a firm, legal framework.