Korea becomes 2nd country to ban cryptocurrency ICOs

Authorities in Korea officially banned initial coin offerings (ICOs) on Friday, making it the second country in the world to ban ICOs after China.

“We are currently faced with concerns stemming from increased risk of fraudulent fund-raising activities posing as ICOs as well as possible consumer damage and market overheating due to the rising demand for speculation,” said Kim Yong-beom, vice chairman of the Financial Services Committee (FSC), during a meeting on Friday. “For this reason, [the authorities] have decided to ban all forms of ICO regardless of technologies or terminologies.”

ICOs, also called token sales, are a process of raising capital by new cryptocurrency ventures. Instead of issuing stocks or obtaining seed money from venture capitalists, cryptocurrency start-ups issue coins to raise funds. These companies often issue white papers beforehand, which explain the details of their plan including how the fund will be spent as well as their technology.

The FSC said in the press release that it’s discovered cases where investors were scammed out of money by an illicit fund-raising project that imitated an ICO. Earlier this month, law enforcement in Korea arrested four individuals for obtaining some 25 billion won ($21.8 million) from 1,000 investors in a fraudulent scheme that they claimed was an ICO. The “tokens” that they sold were not traded on the market.

The commission said it will also monitor financial companies in Korea from participating in cryptocurrency trading.

Although initially unregulated, other countries around the globe are tightening their grip on ICOs. The Securities and Exchange Commission of the United States, for instance, decided in July to apply the existing federal securities laws on token sales, “determining that DAO [decentralized autonomous organization] tokens were securities,” according to the commission. Essentially, any company seeking to raise capital through coin offerings in the United States has to fulfill all the criteria necessary for an initial public offering.

While countries such as the United States and Singapore decided to regulate token sales through existing laws, China and Korea are the only two countries in the world that are completely prohibiting ICOs.

China became the first country in the world on Sept. 4 to completely prohibit cryptocurrency sales to raise funds. The People’s Bank of China said ICOs can seriously damage “the economic and financial order of China.”

“The biggest problem with ICOs in Korea is that the process is often not completely transparent,” said a cryptocurrency expert. “But the process of funding through ICOs is currently undergoing a learning process, which is a must for anything that is new.”

The expert, who’s considered one of the leading figures in the ethereum community, further added, “It is necessary to prohibit non-transparent fund management, which goes against the philosophy of public blockchain in the first place.” “But the government is ruling out ICOs for the sake of consumer protection instead of putting an effort to differentiate the legitimate activities from illicit ones.”

Vitalik Buterin, the co-founder and developer of ethereum, the second-largest cryptocurrency in the world by market capitalization, said in a recent interview with the Korea JoongAng Daily that a complete ban on ICOs is likely to hamper technological development. The Russian-Canadian programmer said open-source software development, in this case the public blockchain system which cryptocurrencies are based on, is hard to monetize in the first place. ICOs work as the source of funding and incentive for programmers to jump into the system development.

The measure by the government on Friday may ostracize Korea from the global cryptocurrency market, according to some experts.

“Now that the Korean authority has revealed its policy to ban ICOs completely, foreign [cryptocurrency] companies are likely to rule out Korea in their fund-raising process,” said Kim Jin-hwa, the co-founder of Korbit. Korbit is one of the leading cryptocurrency trading exchanges in Korea.

BY CHOI HYUNG-JO, KO RAN [choi.hyungjo@joongang.co.kr]