What Can China Learn from South Korea

And could one of the world's largest economies one day re-open the doors to crypto assets?

Crypto assets have been discussed in the mainstream media for almost two years now and in that short period of time, we have seen rapid change in the sub-culture spawned out of them, adoption by some commercial entities and adaptation of laws across the globe.

In this article, Thomas Anthony Hulme explores the existing laws that affect the crypto asset markets in both China and South Korea, compares each of them and then applies the law to the current crypto asset market, whilst also briefly discussing Facebook’s recently announced crypto asset, Libra.

The law in China

The primary regulator to monitor crypto asset regulation in China is the People’s Bank of China (the “PBOC”). Since the rise in interest and respective price of crypto assets towards the end of 2017, different concepts and activities have been created by the crypto asset market participants. Some of these activities include the creation and issue of different types of crypto asset such as Security Tokens, Stable Coins and Exchange Coins.

The concept of crypto asset mining is a regular and profitable (for some) activity, which involves owners of powerful computers connected to particular blockchains and mining particular crypto assets.

The increase in popularity has led to the creation of a large number of crypto assets with speculative prices, which were then traded on crypto asset exchanges in exchange for FIAT currency or another crypto asset.

These activities encouraged the PBOC to regulate the market. It is important to distinguish what exactly is prohibited in China and what is not.

Initial Coin Offerings (ICO) or activities undertaken for fundraising purposes with a crypto asset element are prohibited. This is due to widespread criminal activity and fraud, which accompanied the ICO trend in early 2018. Issuing new crypto assets is not prohibited, however, issuing them in exchange for mass funding is.

Financing activities and trading relating to crypto assets are also prohibited. This includes crypto asset exchanges, which allows for the public purchase and sale of crypto assets for FIAT currency; this is due to the similarities between conducting activities in this way and typical financial trading activities.

The PBOC has provided guidance on crypto assets generally but greatly in respect to Bitcoin alone. Crypto assets are not banned and the government appears to be encouraging the development of blockchain technology associated with crypto assets but putting much emphasis on the application of the technology as a centralised piece of technology.

The government has made a certain distinction between “sovereign” crypto assets, which the PBOC would wish to issue, and “non-sovereign” crypto assets.

The law in South Korea

South Korea’s approach is not as stringent as China’s; however, they still have a couple of important laws to note.

Firstly, much like China, ICOs of any type are prohibited for similar reasons as China. Crypto asset trading is not banned, however, there are laws that state that crypto asset purchasing and trading must not be leveraged and therefore the crypto asset exchanges cannot offer derivative crypto asset products with built-in leverage or margined accounts.

The concept of crypto asset mining is a regular and profitable (for some) activity, which involves owners of powerful computers connected to particular blockchains and mining particular crypto assets.

South Korea’s securities laws are much like the ones adopted by the majority of countries in the world who have a form of crypto asset regulation; if the crypto asset acts as a security, it will be treated as one.

How does each jurisdiction compare?

The laws in each country are not too dissimilar. The most important difference is the trading activity, which is lightly regulated in South Korea, in comparison to China where it’s totally banned.

In my view, this is linked to China’s approach to ICOs and the string of illegal and anti-consumer friendly activities that happened as a result of the fallout of the ICOs.

However, as crypto assets are growing in popularity generally around the globe, it appears that the masses are beginning to adopt the idea of crypto assets.

China will need to monitor this progression as if they continue to ban crypto asset exchanges and trading, it may stun growth in China’s crypto asset market.

 The future of crypto assets

The crypto asset market has developed and grown since the hype, which ensued in late 2017. There is now a better understanding and a clear distinction between private blockchain, public blockchain and crypto assets with particular characteristics.

It is a growing trend that crypto assets are used for their fundamental value – the blockchain technology as a piece of financial technology to allow access to digital payments to a larger portion of the world that currently has access to it and the transfer of wealth with minimal delay and cost.

The first major example of this was JP Morgan announcing that they intend to produce an internal, private blockchain crypto asset, which will be available for clients to transfer wealth internally more efficiently whilst reducing general overheads.

More recently it was announced that Facebook is to release their own crypto asset named Libra; Libra will be a crypto asset used to send wealth in a much more accessible way.

Libra will allow users of certain messaging apps, such as Facebook and WhatsApp, to send Libra over messages as if it were a picture.

It is probable that with the announcement of Libra and the interest the Chinese people appear to have in the announcement, this concept of Libra could be replicated in China and a similar crypto asset could be sent across their messaging app WeChat.

It will be priced in US Dollars however its price will be derived from a basket of investments and securities. Libra will essentially be an Exchange Traded Fund, which can be held as a digital asset and transferred with greater accessibility and liquidity.

The intention is that Libra will be able to be used in exchange for real products from the business that wish to prescribe to its infrastructure, therefore it will need to be bought and sold by providers but also exchanged on an exchange.

If this is an example of the direction crypto assets are heading, China may need to re-evaluate their approach to exchanges and trading crypto assets in order to facilitate this movement and growth.

It is probable that with the announcement of Libra and the interest the Chinese people appear to have in the announcement, this concept of Libra could be replicated in China and a similar crypto asset could be sent across their messaging app WeChat.

Like South Korea, allowing exchanges to operate, but under greater scrutiny and rules, is likely to be the best approach moving forward, contemplating the changes in the crypto asset industry to allow its progression to the point where crypto assets are just another asset in everyone’s day-to-day life.

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