Cryptocurrencies are like casinos
During a shutdown of nearly two hours, the price of bitcoin cash plummeted by nearly 1 million won ($899) locally and also brought down its global value. Although Bithumb users are preparing to file a lawsuit against the exchange, the incident over the weekend highlighted one big problem in the trade that Korean investors have ignored - the absence of any legal protection or regulation. Cryptocurrencies are not considered financial products by the Korean authorities nor are they classified as legitimate currency.
It all started when a bitcoin hard fork, originally scheduled for today, was called off on Nov. 8. A hard fork is a type of software upgrade that changes certain codes of the bitcoin protocol and increases the block size of the currency - with the potential of ultimately creating two completely different coins. Before it was called off, the planned hard fork was creating a surge of interest and the value of bitcoin reached nearly $8,000 on Nov. 8.
Immediately following the cancellation, bitcoin investors began selling. At the same time, bitcoin cash, whose hard fork was also scheduled for Nov. 13, began gaining traction among investors who expected its price to rise. Bitcoin cash is an offshoot of bitcoin that came out of a bitcoin hard fork in August.
The price of the altcoin, which refers to cryptocurrencies other than the original bitcoin, was less than one-fifth of bitcoin’s before Nov. 8. But investors started flocking to bitcoin cash. Its selling price, which stood at around 934,000 won on the Bithumb exchange at midnight, Nov. 11, jumped to 1.38 million won in just 24 hours.
Korean investors aiming for short-term profits jumped on the bandwagon. Bitcoin cash’s value reached 2.8 million won by 4 p.m. on Nov. 12 and its global trading volume stood at around $8 billion, half of which took place on the Bithumb exchange.
Bithumb’s server could not handle the traffic - five times the normal volume - and crashed at 3:50 p.m. During the nearly two-hour shutdown, traders were not able to buy or sell. Bithumb was trading about 4 trillion won worth of bitcoin cash that day, and its crash sent tremors across the globe.
According to CoinMarketCap, a cryptocurrency data provider, the global price of the currency went from $2,426 to as low as $1,342 on Sunday. Bithumb users had to watch from the sidelines as the value of bitcoin cash tanked.
Some Bithumb users are reportedly preparing to file a lawsuit, asking the exchange to cough up the difference of the value of their holdings from before and after the crash.
“Although the exchange is not a financial company, [plaintiffs] can be compensated in accordance with the civil code for negligence or gross negligence,” said a local lawyer. “The fact that [Bithumb] did not fortify its server despite several crashes for similar reasons in the past may be enough to hold Bithumb responsible.”
Bithumb users argue that while the exchange is profiting from the commissions it charges traders, it failed to invest sufficiently in its server. The commission that Bithumb charges traders is 0.15 percent, which means it pulls in about 1.5 billion won in commissions daily, given that daily trading volume stands at 1 trillion won.
Still, the cryptocurrency market, which is unregulated and open 24/7 with dramatic ebbs and flows, is not clearly categorized by Korea’s financial authorities. In September, officials from the Bank of Korea and Financial Services Commission, Korea’s financial regulator, reportedly mulled the possibility of classifying them as commodities rather than currencies, as they saw the coins as holding no clear value. But they also avoided designating cryptocurrencies as financial products.
“Right now, these exchanges are rampant with speculation as if they are gambling sites,” said a source from the government. “[The authority] is currently considering various options [to regulate cryptocurrency exchanges] such as directing local banks to not provide virtual accounts to exchanges without proper safety measures in place or imposing voluntary regulation by launching an association for the exchanges.”
BY KO RAN, CHOI HYUNG-JO [firstname.lastname@example.org]