[Expert Opinion] "Deadline for 9·24 Defective Coins Approaching... Investors Must Raise Awareness and Participate in Market Self-Regulation" [The Swamp of Defective Coins]

[Report on 316 Victims of Fraudulent Coins] Expert Recommendations
September 24 Marks D-80 for the Special Financial Transactions Act
Concerns Over Underground Financing Similar to the Loan Business Act
Possibility of a Coin Underground Economy Due to the 'Balloon Effect'
Name Restrictions and Investor-Led Market Self-Regulation Needed

In May, the Bitcoin price was displayed on the screen in the lounge of Bithumb Gangnam Center in Seoul. [Image source=Yonhap News]

[Asia Economy Reporters Koo Chae-eun and Gong Byung-sun] Will all bad coins disappear once the Specific Financial Information Act takes effect on September 24?

The "deadline" for bad coins is approaching in about 80 days, set for September 24. From that point onward, only companies that have passed ① Information Security Management System (ISMS) certification, ② real-name verified deposit and withdrawal accounts (real-name accounts), and ③ qualification screening for business representatives and registered executives will be allowed to operate as "virtual currency operators."

However, experts worry that the enforcement of the Specific Financial Information Act on September 24 could follow a path similar to the "legalization of private loans" under the Loan Business Act. The loan market was incorporated into the system in 2002 with the Loan Business Act, which set an annual interest rate cap of 66%, but as the cap lowered, many loan companies went underground, creating an underground private loan market.

Similarly, while some bad coins will be incorporated into the system under the Specific Financial Information Act, there are concerns that due to high price volatility and the lure of profit-taking, they could become underground or illicit. There is no way to block overseas companies. Asia Economy has conducted an in-depth investigation based on the "Report on 316 Bad Coin Victims" survey results to hear diagnoses and suggestions from six experts on the outlook and alternatives for the chaotic virtual currency market.

Legal Restrictions on Using the Term ‘Bank’...Exchange and Currency Names Should Be Treated as Business Operators and Assets

Jung Yoo-shin, Dean of the Graduate School of Technology Management at Sogang University, said that the terms "virtual currency" or "exchange" need to be corrected first. He stated, "The exchangeability or fundamentals as currency are unclear, and it starts only with an exchange rate compared to Bitcoin, so calling it currency can cause misunderstandings among investors," adding, "The term 'exchange' should also be referred to in the media as intermediary or handling businesses."

In fact, the Banking Act prohibits anyone except the Bank of Korea and banks from using the term "bank" in their business names. Violators face fines up to 50 million KRW. However, virtual currency exchanges lack minimum monitoring or control systems such as segregated deposits or whitepaper verification, and there is no legal basis to prevent them from being called "exchanges." This leads to the problem of investors perceiving them as verified institutions like the Korea Exchange.

Along with promoting the enforcement of the Specific Financial Information Act, there is a diagnosis that investor awareness needs to be improved. In a survey conducted by Asia Economy targeting 316 fraud victims (from June 1 to 15 last month), 36.7% (116 people) answered that they "did not know" that exchanges failing to register with the Financial Services Commission by September 24 under the Specific Financial Information Act must cease operations. Meanwhile, 66.3% (200 people) answered that they "knew."

From the community of 12 cryptocurrency scam victims, a survey was conducted on 316 individuals from the 1st to the 15th of last month (assuming random sampling from an infinite population, the sampling error is ±5.5 percentage points at a 95% confidence level).

Kim Bong-shin, Senior Deputy Director at Realmeter, who advised on the Asia Economy survey, said, "While two out of three knowing this means it is widely known, it should be noted that the survey targeted fraud victims," adding, "It is significant that 36.7% of fraud victims answered they did not know very important investment-related information. This is a point where policy authorities need to strengthen publicity." He also pointed out that among fraud victims, 47.5% (150 people) described their investment as "high-risk, high-return speculative investment," 34.2% (108 people) as "preemptive investment in future technologies such as blockchain," and 13.6% (43 people) gave other answers.

Kim said, "The fact that fraud victims responded this way can be interpreted as recognizing fraud losses as a cost that corresponds to the risk of high returns." Regarding the 34.2% who answered "preemptive investment in future technologies," he said, "This may represent the perception of the younger generation who feel existing investment assets have been monopolized by older generations," adding, "It also implies the need to provide broader opportunities to the older generation in the future."

Strict Listing Screening and Market Self-Regulation Starting with Investors

There are also opinions that listing screening procedures should remain strict even after the enforcement of the Specific Financial Information Act. Oh Jung-geun, President of the Korea Financial ICT Convergence Society, said, "The biggest problem was that small exchanges listed coins without substance to earn fees. Exchanges with certified security should support virtual currency trading through listing standards comparable to stocks." However, he warned that if only 4 to 5 exchanges remain in the market, side effects could occur. He said, "If too few exchanges remain, they could abuse their power by demanding listing fees," adding, "About 10 to 20 exchanges would be appropriate."

There is also an opinion that virtual currency investors themselves should participate in market self-regulation. Kim Seung-joo, Professor at Korea University Graduate School of Information Security, said, "No matter how much regulation or legislation is implemented, if there is demand in the market and investors want coins with higher volatility rather than quality coins, the problem of bad coins will continue." He added, "If investors focus only on 'profit-taking' and do not approach blockchain technology itself, they will not be able to identify proper coins," emphasizing, "Understanding the industry is fundamental to participating in the market, which will help stabilize it."

Mixed Opinions on CBDC Coin Impact...Participation in Structured Forms by Banks and Securities Firms Could Absorb Demand

Jung Dae-young, a financial expert from the Bank of Korea and head of Songhyun Economic Research Institute, believes that the introduction of Central Bank Digital Currency (CBDC) could significantly reduce the bad coin issue. CBDC is "digital cash" issued by the central bank based on blockchain technology. Its value is guaranteed by the central bank. Therefore, unlike private cryptocurrencies like Bitcoin, whose prices fluctuate, CBDC maintains a stable value, and the introduction of centralized CBDC could diminish the bad coin issue. Jung said, "CBDC could absorb a significant portion of uncertain and opaque virtual currency investment demand," adding, "Since the government legally sets exchange value, the bubbles of so-called 'junk coins' will deflate and their position will shrink."

However, an expert who requested anonymity raised objections. They argued that the payment function of CBDC is unrelated to the demand for "profit-taking" in listing and dividend processes. The expert said, "CBDC is for commercial payment and could compete with things like credit card points, but the problematic bad coins are for investment purposes such as listing and dividends, so CBDC cannot replace that demand," adding, "Although the technology is similar, the user groups are completely different."

The expert further mentioned that allowing financial firms to invest in virtual currencies with underlying assets, such as "security tokens," would help market transparency and stabilization. They suggested that institutional finance should offer virtual currency investment demand in the form of structured products and take responsibility for investment-related disputes and consultations. Financial firms also have demand for virtual currency investment as an inflation hedge. The expert said, "Currently, junk coin scams are almost at the level of gambling industries, and the problem is that there is no verification of which 'coins' are issued," adding, "If banks, securities firms, and other institutional players can create coin structured products through thorough screening, alternative investment demand for coins could be absorbed into the institutional system."