Digital Currency: The First Economic Surprise for Moon
January 25, 2018
Sudden rise of digital currency creates the first domestic challenge for Moon Jae-in – and perhaps the most important thing he’ll ever do economically.
Since taking office last summer, South Korean President Moon Jae-in’s biggest challenge has been to manage the competing interests of the U.S. and China as all three countries contend with the acceleration of North Korea’s nuclear weapons and missiles. Domestically, Moon has had it easier, enjoying an improving economy and the strong support South Koreans typically give to new presidents.
But that changed because of a force that no one saw coming during those big street protests that swept out former President Park Geun-hye and brought Moon in – digital currency.
South Koreans last year became some of the world’s biggest-by-volume purchasers of bitcoin and other cybercurrencies, helping to drive surges in value that made global headlines and attracted many more people to them. Some estimates say 1 million South Koreans actively trade digital currency, so many that they are paying higher prices than others around the world – a “kimchi premium.” The won was the fourth-most used currency to buy bitcoin last year, after the U.S. dollar, euro and Japanese yen.
This speculative fever alarmed the South Korean government, which became one of the first to try to constrain digital currencies. In recent weeks, it partly succeeded in popping the ballooning value of bitcoin and other digital currencies with talk of restrictions on trading.
That angered Korean digital currency investors, many of them young people who were at the core of Moon’s political base. Surveys last week showed the first significant erosion of domestic support for Moon, coinciding with the latest twists in the cybercurrency debate and anger at his sacrifice of the South Korean women’s hockey team in an Olympic olive branch to North Korea.
The economic work Moon hoped to emphasize – raising the minimum wage and boosting government hiring, even grappling with Donald Trump’s desire to change the U.S.-Korea free trade agreement – has been overshadowed. The Moon government first proposed banning trade in cybercurrency in late September. Several versions of a ban floated since then, chiefly focused on the anonymous nature of the trading.
South Korean authorities worry that digital currency poses a greater investment risk than people may realize. But they also see two problems in cybercurrencies that go beyond that risk. One is the prospect that North Korean hackers will steal bitcoins and other digital currency to fund activities that go against the security interests of South Korea. The other is that digital currency provides an exit for South Korean capital that authorities can’t control.
The first is a security matter that, while in a new form, exists already and for which presumably the South Korean government already guards. The second is an issue at the heart of the country’s economic development, perhaps even the Korean identity.
For all the distance South Korea has come in its 50-year climb from poverty to wealth, the country’s financial policymakers still fiercely try to preserve influence over the value and movement of the South Korean won. For instance, they have not allowed the won to be bought and sold outside the country; South Korean travelers know they should exchange at the bank or airport before taking an international trip. And, the country has imposed capital controls at various times on outside investors to discourage volatility in the won’s value. The most significant such move in recent years was in 2010 when the government hoped to limit a rush of capital inflow. The worry then was that purchasing of the won would raise its value at a moment when a weak won helped Korean exporters compete in the then-weakened global economy.
The fear about digital currency also relates to volatility: this time involving South Koreans and, specifically, their new ability to make the won simply disappear. South Koreans were prevented from easily converting won to other hard currencies, but they can easily do so with bitcoin, ether, or other digital ones. In a hearing at the National Assembly last week, Shim Jae-chul of the justice ministry said any purchase of a cybercurrency represented a “serious outflow of cash from the domestic market.”
The Moon government was suddenly in the role of deciding what is the greater civic good: unity around the country’s currency or the liberty of its citizens to do with their money what they want.
South Korean investors in digital currency believe the government is trying to ruin their ability to get rich. One of the most widely-signed online petitions protesting restrictions on cybercurrency was titled “Has the government ever allowed a happy dream?” With the investor community skewed to the young – a survey by Bithumb, South Korea’s largest cryptocurrency exchange, found that more than 60% of bitcoin investors are under age 30, the Wall Street Journal reported – Moon risks alienating a group that he pledged during last year’s campaign to help. For years, young adult unemployment has been abnormally high in South Korea, a factor in the discontent that helped drive out Park.
Things moved quickly this week. On Sunday, the government moved away from talk of an outright ban and said it will instead require banks and digital currency hubs to maintain and provide records on all trading by South Koreans. It cited existing money-laundering rules, saying they would naturally have to extend to digital currency. Such records could also be used by the government to collect a tax on gains from cybercurrency trading.
On Tuesday, South Korean financial regulators said they would allow six banks to begin to sell digital currencies and that trading would have been to done using real names, with identities verified, and records kept. Trading in anonymous virtual accounts will be illegal as of January 30. Foreigners will not be allowed to trade digital currencies via South Korean banks and exchanges after that date. Some Korean cybercurrency exchanges halted foreigner activity immediately.
It’s a big swing from the discussion of banning digital currencies entirely. Even so, some South Korean investors in digital currency are bound to remain unhappy, particularly if the government follows through with capital gains taxes. But the move also begins to create some legitimacy and regulatory oversight that may attract more people to invest in digital currency.
South Korean banks did not offer accounts in foreign currencies previously. No South Korean has ever considered depositing a portion of their biweekly paycheck into Australian dollars as an investment play. But the growing legal and technical infrastructure, along with the hype, around digital currency means that more South Koreans may change their won into something else. That puts competitive pressure on the won – and the broader South Korean economy – to deliver value.
Also, economically, nothing identifies a South Korean individual or company more than use of the won. The success of South Korea’s exporters, key to the rise of the country since the 1960s, is inextricably bound up in the value of the won. Keeping some control over the won is ultimately why South Korean policymakers have not allowed it to internationalize; why the won cannot be exchanged at a bank in Minnesota or Madagascar. In a blink, they gave up some of that control and, perhaps, some of what it means to be South Korean.
The Moon administration isn’t even a year old and the president still hopes to follow through on many of his progressive economic ideas. But there’s a chance the most consequential economic action of his presidency just happened.