[Viewpoint] Investor Protection Needed to Match Cryptocurrency Taxation

Seong Hee-hwal, Professor at Inha University School of Law

About three years ago around this time, I published a paper discussing regulatory measures for cryptocurrency initial coin offerings (ICOs) and listings. At that time, the prevailing discourse was that although there were generally negative opinions about cryptocurrencies, the underlying blockchain technology could represent a revolution surpassing the internet. Therefore, rather than extreme measures such as banning cryptocurrencies, regulatory approaches that consider both investor protection and innovation were necessary.

Regrettably, three years later, I have become more reserved about not only cryptocurrencies but also the future of blockchain. Deep learning artificial intelligence, which began to develop seriously around the same time blockchain emerged about a decade ago, has since dramatically transformed the real world with innovations like AlphaGo, AlphaFold, autonomous driving, and GPT-3. However, blockchain still exists mainly in the virtual world, and its connection to the real world is not perceptible. Moreover, cryptocurrencies, which can be considered the fuel of blockchain, often feel like outright scams, as seen in absurd cases like Dogecoin or Jin Doge Coin. Thus, despite the explosive growth of the cryptocurrency market, the government's negative stance is somewhat understandable. Nevertheless, for the following reasons, I believe it is now necessary to implement active regulations on cryptocurrencies to protect investors while laying the foundation for long-term innovation.

First, the coin market has reached a critical point where it can no longer be left unattended. In just a few months this year, the number of investors has reached about 5 million, roughly half the size of the stock market, with tens of thousands of new accounts opening daily. Particularly, the trading volume has reached an absurd level that overwhelms the stock market. There are concerns about the aftereffects when speculative bubbles burst due to natural market corrections. In Korea alone, there are hundreds of unidentified junk coins being traded, and various types of fraudulent and illegal activities are rampant, making it impossible to predict the extent of the risks. The government worries that institutionalizing regulations might further stimulate speculation, but based on past experience and the already unimaginable speculative frenzy, it seems unlikely that institutionalization will lead to a significant increase in new inflows.

Second, investor protection commensurate with taxation is necessary. In the movie Shilla’s Moonlit Night, Ma Cheon-su (played by Lee Won-jong), a gangster boss in the Gyeongju area, tears up a reserve forces training summons, saying, “What has the motherland ever done for me?” Similarly, the government’s reckless disregard for investors?claiming no intention to protect them while still insisting on collecting taxes?has provoked public outrage among investors.

Third, cryptocurrencies are universal investment instruments without nationality, and major countries are actively regulating them to protect investors while indirectly supporting blockchain innovation. Countries such as the United States, the EU, Japan, France, Germany, and Singapore are promoting rational market development by protecting investors through licensing and registration systems. What use is it for Korea alone to suppress or ban cryptocurrencies freely traded in major countries?

Fourth, there is a need to support blockchain innovation. Recently, innovative technologies such as DeFi (decentralized finance), NFT (non-fungible tokens), and the metaverse have emerged. Although these are not yet ready for direct application in the real world, the history of science and technology is full of unexpected quantum leaps. If there are even hints of innovation, it is better to embrace them with an open mind rather than prematurely stifling their growth.

Fortunately, despite the government’s neglect, proactive legislation by members of the National Assembly aimed at investor protection is underway. However, considering the enormous scale and complexity of the cryptocurrency market, establishing a proper regulatory framework will be difficult without active government legislative efforts. If the government takes the lead, it is appropriate for the financial authorities to oversee the cryptocurrency market due to its financial characteristics and required expertise. When designing regulations for the cryptocurrency market, the focus should be on cryptocurrency exchanges. Unlike the securities market, where roles are divided among securities companies, stock exchanges, deposit and settlement institutions, and securities finance, the coin market’s exchanges monopolize all these functions. Therefore, exchanges should not be treated on the same level as issuers, custodians, or wallet service providers. It is desirable to apply stricter regulations both legally and through self-regulatory measures.

[Seong Hee-hwal, Professor at Inha University School of Law]