One of the major issues in South Korean society late last year was none other than cryptocurrency, which remains a hot topic in 2018 as well. With the government even considering shutting down digital currency exchanges, controversy is simmering over whether virtual currency trading is investment or speculation. What is cryptocurrency and why it has triggered so much controversy? Here is economic commentator Chung Chul-jin to analyze the virtual currency frenzy in South Korea. First, let’s define exactly what cryptocurrency is.
The keyword of cryptocurrency is “digital.” It does not take the traditional form of coins or paper banknotes but only exists online. It is a digital asset using cryptography. Developers of cryptocurrencies continue to present sort of mathematical formulas and users solve them using the computer. The process is not that difficult. Simply put, a cryptocurrency is an encrypted digital currency. It is similar to game money. While game money is only used in particular games, the encrypted digital currency can be traded, like money that is used to buy bread or pay hotel bills.
Cyptocurrency is virtual money that was created on the Internet. The first digital currency is Bitcoin, which was created in 2008 by programmer Satoshi Nakamoto using “blockchain” technology. A certain amount of Bitcoins is produced once every ten minutes when a mathematical puzzle presented by a programmer is solved. This process is known as “mining.” The digital money earned in the mining process can be transferred without the need for banks or card companies. With it, users can also purchase and pay for certain goods or services. It has various advantages, such as no transaction costs and the easy transaction process. As of January 14, there are 1,429 kinds of cryptocurrency in the world. It is estimated that the global cryptocurrency market grew to 800 trillion won or about 720 billion US dollars last year. Why is the market growing at a blistering pace?
People began to distrust paper banknotes. Currencies like the dollar, the euro and the yen are sometimes issued at random to cause various problems, including inflation, although they are under the control of central banks. Due to growing skepticism about existing currencies, people began to turn their eyes to virtual currency. Moreover, digital currencies have generated incredible profits, with the prices of some currencies going up by 40, 50 or 80 times in just one or two years. Bitcoin prices, for example, have soared by 20 million times, compared to 2009 when the currency was first released. If you had invested 1,000 dollars at that time, the money would amount to 200 million dollars now.
Cryptocurrency appeared in 2008, when central banks in many countries adopted a monetary policy of quantitative easing to tackle the global financial crisis. Due to a lack of trust in major currencies such as the dollar and the euro, digital currencies began to draw attention. It is regarded as a highly lucrative financial product. On January 1, 2016, the average market price for Bitcoin was 430.72 dollars. But it closed at 13,406 dollars on December 31, 2017. With some digital currencies skyrocketing by more than 4,500 percent in just a year, investors began to swarm into the market. In South Korea, in particular, daily trade volume reaches between 5 trillion won and 10 trillion won, meaning 150 trillion to 300 trillion won each month. Even foreign media outlets have expressed concerns over the unusual cryptocurrency craze in South Korea. The government has rolled up its sleeves to regulate digital money investment.
In early 2017, there were less than 150-thousand cryptocurrency accounts here, as far as I remember. But the number neared a whopping 3 million by the year’s end. Cryptocurrency exchanges do not require government approval, so they are free from government intervention. But for that very reason, they are prone to some problems, including hacking. Late last year, the government began to unveil a series of measures to bring cryptocurrency speculation under control. The measures were mostly focused on strengthening the exchanges. One of the regulations required real-name transactions in virtual currency trading. Other measures include raising the security level of the cryptocurrency exchanges to that of regular financial institutions and blocking accounts held by minors. But controversy over excessive regulation erupted early this year, when Justice Minister Park Sang-ki hinted at the possibility of shutting down local digital currency exchanges. Later, Finance Minister Kim Dong-yeon said that the shutdown is still a viable option. South Korea has now joined the list of countries that regulate cryptocurrency trade.
The government is firmly determined to put a brake on the irrational investment craze for digital currencies. On January 18, Financial Services Commission Chairman Choi Jong-ku said that the government is considering the idea of closing all cryptocurrency exchanges or only exchanges that commit illegal activities. But it isn’t easy to regulate virtual currency trade. Even if local exchanges are shut down, investors may choose exchanges in other countries to continue with their transactions. Most of all, virtual currencies are rooted in blockchain technology.
We recognize Bitcoin, Ethereum and other cryptocurrencies as an equivalent to regular trading currencies because of blockchain technology. Let me put it this way. “A” sold a used car to “B”. When the trade is done, a data block is produced, and the transaction is recorded in the block. Now “B” sold the car to “C”. The transaction between B and C also produces another data block, which is linked with the previous block to form a chain. Countless subsequent transactions are linked in this encrypted block chain. It is extremely difficult to hack this system because hacking requires breaking all the blocks, from the first one. That’s why the system is considered quite stable. All confirmed transactions are stored in a ledger, which is open to the public. Blockchain technology is indispensable for Internet-based peer-to-peer (P2P) financial transactions, and the technology is embedded in encrypted digital currencies. So it is impossible to separate cryptocurrencies from blockchain technology.
A blockchain is like an electronic ledger, where transaction records or blocks are linked to a chain. Whenever transactions are conducted, the records of the virtual currency movements remain in the accounts held by all the involved users. Once recorded, the information on the blockchain cannot be altered. So this technology can prevent forgery, alteration and hacking and will therefore promote transactions between individuals. It is suitable not only for financial transactions but for certificate issuance, in which trust is essential. The development of blockchains will make brokers disappear to reduce transaction costs significantly. Characterized by security, transparency and expandability, blockchain is a representative technology of the fourth industrial revolution. In reality, however, it is difficult to promote this technology on one hand, while regulating cryptocurrencies on the other hand. It is necessary to come up with more effective measures, other than simply separating digital currencies from the blockchain.
Experts are skeptical about only supporting blockchain technology and curbing cryptocurrencies, since the two concepts cannot be separated. But some suggest that another form of blockchain could be created or a new encrypted program may replace blockchain technology to ensure the security of individual transactions. But most experts are expecting the arrival of a new world of peer-to-peer transactions, with some describing it as an encrypted economy, based on blockchain technology and digital currencies using cryptography. I think it will be ideal to bring the two concepts together in a proper way, rather than separating one from the other.
In the era of the fourth industrial revolution, new technologies and services have emerged to often clash with existing systems. The ongoing controversy over cryptocurrency trading is one such example. Attention turns to what extent the Korean economy will recognize technological innovation and how to reach a social consensus on related issues.