"If lawlessness is left unchecked, it becomes 'Bada Iyagi'... White paper issuance and decentralized custody must assign responsibility" [The Swamp of Bad Coins]

[Report on 316 Victims of Fraudulent Coins - <3>] Fraudulent Coin Prevention Law Reaches National Assembly
Lee Yong-woo, Democratic Party of Korea
"Must Break the Cycle of Victims Becoming Perpetrators"
Proposed the Virtual Asset Business Act
Key Points: Financial Services Commission Approval and Punishment for Market Manipulation
Need to Set Rules and Establish Order

Lee Yong-woo, Democratic Party of Korea lawmaker. Photo by Dong-joo Yoon doso7@

[Asia Economy Reporters Koo Chae-eun and Gong Byung-sun] "If mishandled, it could lead to a proliferation of victims like the ‘Bada Iyagi’ case and escalate into a major social issue. Exchanges must be enabled to perform their roles by issuing whitepapers, implementing segregated custody, and starting a licensing system."

Lee Yong-woo, a member of the Democratic Party of Korea who first introduced the related bill (the Act on Virtual Assets) last month at the National Assembly’s Political Affairs Committee Bill Subcommittee 1, said in an interview with Asia Economy, "The prompt passage of the bill is necessary to prevent fraudulent coins." He agreed with the concerns raised in our report (June 23 issue, page 4, ‘Victims Becoming Perpetrators: The Multi-Level Marketing of Fraud’) and said, "The vicious cycle of fraudulent coin markets is that victims become insiders." He added, "To prevent this, exchanges issuing coins must publish whitepapers and undergo a verification process."

He also mentioned that, in the long term, if false information is found in capital market disclosures, there should be “punitive penalties” similar to the ‘150-year prison sentence for Enron’s accounting fraud.’ His diagnosis is that weak penalties for economic crimes and regulatory gaps in virtual currencies have intensified coin scams. He said, "Posting a whitepaper means ‘tell us what the product (coin) you want to issue is,’ and segregated custody is something that exchanges must do to prevent exit scams." Reflecting the recent environment of persistent ‘fraudulent coin’ scams in the altcoin market, the bill also includes provisions for Financial Services Commission licensing and penalties for market manipulation.

Lee Yong-woo, Democratic Party of Korea lawmaker. Photo by Dong-joo Yoon doso7@

Currently, fraudulent coins are being easily issued and false information is being spread without any regulations that exchanges should properly follow, and no one takes responsibility for the false information, leading to widespread scams, according to Lee. He pointed out, "In the current virtual currency industry, it’s common to hear ‘If you have a certain reputation, you can issue a coin,’ showing how chaotic the market has become."

Lee also added that debates about the fictitious nature or reality of virtual currencies are meaningless. He said, "Whether it is money or not is not the fundamental issue. If that argument continues, it would lead to debates about ‘suspending gold convertibility.’" He emphasized, "If it is a market that is clearly traded and exists, the government’s role is to acknowledge reality and set the rules." For example, just as securities analysts write reports based on listed companies’ disclosures, he envisions that analysis firms based on whitepapers could emerge in the coin market, or banks dedicated solely to virtual currency custody could be established if segregated custody is mandated.

He cited the Basel Committee on Banking Supervision (hereafter Basel Committee), composed of representatives from central banks and banking supervisors of major advanced countries (G10), which recently assigned a 1250% risk-weighted asset (RWA) to virtual currencies. RWA is an evaluation weighted by risk level of the money lent, meaning banks must hold assets 12.5 times the amount of virtual currency they invest in Bitcoin. He said, "Banks invest as a risk hedge considering inflation." He added, "Therefore, the most necessary task is to create order so that accurate information is disclosed in the market and ‘fraudulent coins’ disappear through self-cleansing mechanisms."