Controversy over crypto continues as some call for countermeasures

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Controversy over crypto continues as some call for countermeasures

Published: 02 Jun. 2022, 17:51

The crash of Luna in May has reignited the controversy over the worth of cryptocurrencies and the countermeasures aimed to prevent another such meltdown that is being described as a Ponzi scheme.

International Monetary Fund Managing Director Kristalina Georgieva compared some cryptocurrencies to pyramid schemes at the World Economic Forum meeting in Davos, Switzerland, in May, while European Central Bank President Christine Lagarde said cryptocurrencies are “worth nothing” on a Dutch television program in the same month. Heng Swee Keat, the Deputy Prime Minister of Singapore, warned retail investors on Tuesday to “steer clear of cryptocurrencies.”

In Korea, authorities and experts are highlighting the need to quickly enact relevant laws and place bigger responsibility on crypto exchanges to prevent another such crash from happening.

“The Terra incident heightened the need to accelerate the legalization” of cryptocurrencies, said lawmaker Yun Chang-hyun of the People Power Party (PPP) at a press conference held at the National Assembly in Yeouido, western Seoul, on May 24.

“We requested that the government establish basic laws on digital assets for the mid-term, and revise the enforcement ordinance of the Act on Reporting and Using Specified Financial Transaction Information for the short-term to protect” investors.

The act aims to prevent money laundering and terrorist financing by imposing obligations on financial institutions, including virtual assets service providers like cryptocurrency exchanges.

The value of TerraUSD, a stablecoin pegged to $1, and its sister coin Luna plummeted in mid-May. Luna was once No. 8 globally in terms of market capitalization, peaking at $119.22 on April 5. It collapsed to trade at less than a cent.

The prosecution in Korea launched an investigation into the crash that was filed by a group of investors against Terraform Labs, the company behind Terra coins, and its co-founders for fraud and fund-raising without approval.

Terraform Labs relaunched Luna on May 28.

Lawmaker Yun Chang-hyun of the People Power Party (PPP), second from left, speaks at a seminar held to discuss reasons and countermeasures for the Luna crash in western Seoul on May 23. [NEWS1]

Authorities and experts

Lawmakers and the Financial Supervisory Service (FSS) agree that the lack of legislation for virtual assets have limited their risk management.

“Currently, there are no laws regulating cryptocurrencies in Korea apart from money laundering on the grounds of the Act on Reporting and Using Specified Financial Transaction Information,” said Ahn Byung-nam, a senior associate at the FSS. “There is a limit for the FSS to supervise on cryptocurrency assets because there aren’t any relevant laws.”

The act mandates that virtual asset service providers must use real-name verified bank accounts for financial transactions with their customers and separate customers’ deposits from their operating money.

“In Korea, there are no clauses that require virtual asset service providers to make public announcements when they issue a new cryptocurrency,” said Kim Kab-lae, a research fellow at the Korea Capital Market Institute.

The purpose of making regulatory filings is to reduce information asymmetry among small and big investors.

“The announcements are being made freely through the whitepaper, which is mostly written in English,” Kim added. He said the language barrier adds difficulty to domestic investors when investing in crypto, and some service providers are taking advantage of that language barrier to avoid informing investors of the risks.

“We should quickly enact a basic law to signal [to the market] that the authorities are managing [virtual assets] and are ready to respond immediately when problems arise,” National Policy Committee Chairman Yun Jae-ok said at the May 24 press conference.

“There are 13 bills aimed at protecting virtual asset investors that are pending at the National Assembly,“ said the Financial Services Commission (FSC) Vice Chairman Kim So-young. “To introduce an effective regulatory system on cryptocurrencies, it’s important to have a thorough grasp on overseas cases and strengthen cooperation with international organizations and countries.”

One of the bills, proposed in October by a group of lawmakers led by Yun, says virtual asset service providers should be mandated to notify investors on the information of its business, cost and risks of facing loss.

A separate bill proposed in November by lawmakers, including Kim Eun-hye of the PPP, would define virtual assets as electronic tokens that carry economic value. The bill further suggests authorizing the FSC on supervising and disposing cryptocurrency exchanges, and allowing the organization to impose penalties on virtual asset service providers that violate the internal controls supervised by compliance officers.

LKB & Partners attorneys speak to reporters at the Seoul Southern District Prosecutors' Office after filing a complaint against Terraform Labs and co-founders Do Kwon and Daniel Shin on May 19. [NEWS1]

Cryptocurrency exchanges

Some are putting the blame on cryptocurrency exchanges, saying they allowed the trading of the Terra coins despite having understood the risks.

“Though there aren’t established laws or systems, there were doubts [Terra] could cause damage to investors,” said lawmaker Kang Min-kuk of the PPP. Allowing trading of the coins despite knowing its risks “cannot be seen as the free market economic activities but an act of encouraging speculation.”

There were around 280,000 Luna investors in Korea, who held roughly 70 billion tokens in total as of May, according to FSC Chairman Koh Seung-beom.

Luna was available for trading on five domestic cryptocurrency exchanges: Upbit, Bithumb, Coinone, Korbit and Gopax.

They were criticized for allowing the trading of Luna and for not immediately suspending its trading following the meltdown. They continued the trading of Luna for more than a week after the crash.

“Everything seems clear if we can see past the current point of view,” said Lee Sir-goo, CEO of Dunamu, an Upbit exchange operator, at the May 24 press conference. “In the past, there were people who described [Terra] as a very progressive and innovative coin, developed by superb Harvard and Stanford graduate scientists, that proposed a certain value just based on algorithms without backing of any actual fiat collateral.”

Lee added that he thought artificially intervening in the market may distort it.

CEOs at smaller exchanges argue differently.

Lim Yo-song, CEO of Coredax exchange, said the company did not list Luna because there wasn’t a tool guaranteeing the credibility of the token.

“Cryptocurrency exchanges need a uniform inspection standard in evaluating the listing of virtual assets and an external supervising system to minimize customer damage,” said Lim.

Do Hyun-su, CEO of ProBit exchange, said his company did not list Terra coins because the company concluded "the algorithm to be strange during the screening of the listing." He said that an algorithmic stablecoin would inevitably lose its value because there isn’t a device that can guarantee it.

The Terra crash “is an example of a case that shows the importance of the exact evaluation of coins and the need for public announcements of information” that could affect its value, Do added.

As controversy over the coins continues, domestic exchanges are reluctant to allow the trading of the renewed Luna 2.0, a brand new token of the new Terra blockchain intended to restore the Terra Luna system following their collapse.

“After lawmakers publicly asked crypto exchanges why they weren’t suspending the trading of Luna last month, it seems it will be difficult to start the trading of the relaunched Luna any time soon,” an industry insider from a crypto exchange said under the condition of anonymity.

Overregulation

Despite calls for strict regulations, there are concerns that overregulating the rapidly growing crypto market may discourage investors from investing in the Korean market.

“We have to keep in mind that cryptocurrency is traded globally, not just within Korea,” said lawmaker Yun. “We have to be careful about introducing legislation too powerful that may throw investors outside” the country.

Korea’s crypto market has been evaluated by some supporters to have withered over the past few years due to overregulation.

“The crypto market in Korea has been in a dark period over the past five years under the President Moon Jae-in administration,” said Kim Byung-joon, former chairman of the Presidential Transition Committee for Balanced National Development, at a blockchain forum held in April.

“A majority of cryptocurrency companies have been funding the development of cryptocurrency abroad, like in Singapore and Switzerland. That declined a lot of national wealth,” Kim added.

Korea prohibited domestic companies from participating in initial coin offerings in 2017. Korea was also one of the first countries to implement the “travel rule” in April, a system some argued may hinder crypto growth.

The travel rule is an asset-tracking system designed to help authorities track the movement of virtual assets to combat money laundering.

“Laws on virtual assets proposed at the National Assembly should be quickly legalized following an efficient examination,” said Kim from Korea Capital Market Institute. “Laws on virtual assets isn’t just to protect traders. For the blockchain industry to grow sustainably, credibility in cryptocurrency should be guaranteed.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]