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Why South Korea Had to Ban Crypto ICOs and Risk Losing Multi-Billion Dollar Opportunities

Last Updated March 4, 2021 2:53 PM
Joseph Young
Last Updated March 4, 2021 2:53 PM

This week, the government of South Korea officially decided to maintain its existing blanket ban on domestic initial coin offerings (ICO) in a move that could benefit other major crypto markets in Asia.

On Friday, the virtual currency task force of the Office for Government Policy Coordination released a comprehensive report on the ICO industry.

Local financial authorities stated that the government considers the ICO model to be a high-risk investment vehicle in many areas. As such, the government will continue to reinforce a ban on domestic crypto token sales.

It’s Not Just Domestic ICOs, Foreign Crypto Firms Could be in Trouble

Currently, based on existing policies in South Korea, local investors are permitted to participate in token sales conducted outside of the country.

Throughout the past 12 months, the government said that firms abused the regulatory loophole by establishing paper companies in overseas markets.

To circumvent the strict ban on local ICOs, firms based in South Korea have created entities in regions like Japan and Switzerland to conduct token sales.

The financial authorities emphasized that local companies which initiated token sales in overseas markets could still face regulatory issues in South Korea if the companies targeted local investors.

In its recently released report, the Office for Government Policy Coordination said that at least 22 domestic firms have initiated token sales outside of the country.

The authorities have contacted the 22 firms and heard back from 13. The report revealed that on average, each company raised around $30 million in an ICO.

In total, the government estimates local firms to have made roughly $500 million in the last two quarters of 2017.

“Even though these firms raised tens of millions of dollars from ICO, the majority of the companies failed to transparently disclose how the funds were used and refused to cooperate with the government,” the country’s virtual currency task force said.

The local crypto exchange market is going through an investigation into the former executives at UPbit, the country’s largest crypto exchange and several scandals involving minor cryptocurrency exchanges.

Additionally, as CCN.com reported in November 2018, a high profile ICO in South Korea pulled an exit scam, stealing more than $10 million in user funds.

At the time, an industry insider who asked for anonymity told HanKyung:

“The case could have been prevented if the government had implemented proper guidelines and regulatory frameworks related to ICOs. If the government does not establish proper regulations in the short-term, more scams in the local ICO sector could occur.”

Government Officials Not Happy

South Korea bitcoin cryptocurrency
South Korea’s ICO ban could hurt foreign crypto firms as well. | Source: Shutterstock

Following several failed token sales and exit scams, the majority of the industry was in agreement that a strict regulatory framework is needed to protect investors.

But, Min Byung-do, the chairman of the National Policy Committee, said that the government should crack down on money laundering and fraudulent operations without harming the root of the industry.

Chairman Min said:

“The government has to leave the door open for new business models while cracking down on money laundering and speculation with stricter policies. It cannot, however, completely eliminate the root.”

Kim Sun-dong, a member of the Liberty Korea Party, expressed his disappointment in the approach the government has taken toward regulation.

Congressman Kim said that the task force had to take into consideration the future of blockchain development and the crypto sector.

Instead, the government completely banned out an area of the blockchain sector that is widely adopted in leading markets such as Switzerland.

South Korea Missing out on Billion-Dollar Industry

kakaotalk crypto south korea
Source: Shutterstock

South Korea could miss out on multi-billion dollar opportunities with its recent ban on ICOs. Some of the country’s largest companies including Kakao planned to conduct crypto token sales in the past.

Kakao reportedly is the process of initiating a private token sale in Japan worth hundreds of millions of dollars.

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