[Opinion] Concerns Over the Abolition of the Financial Investment Tax and the Institutional Adoption of Cryptocurrency

Regulation Needed to Protect Investors
The Core of That Regulation Is Establishing a Tax Proposal

The recent news that U.S. financial authorities have approved a Bitcoin spot exchange-traded fund (ETF) has once again shaken the cryptocurrency market, which had already surged on expectations of easing inflation. While the ETF approval may raise hopes for an additional surge in Bitcoin, the leading coin in the market, the approval essentially means that cryptocurrencies are entering the formal securities market regulatory framework, which is likely to lead to greater price stability. Once traded as an ETF, cryptocurrencies naturally become subject to securities laws, and with increased trading volume and participants, the influence of speculative trading by certain large investors and insiders diminishes, allowing the ‘wisdom of the crowd’ to operate sequentially according to market conditions.

The ‘Terra-Luna’ crash two years ago is still vivid in our minds. The extradition of Kwon Do-hyung, former CEO of Terraform Labs, to the U.S. is currently underway, and recently, the U.S. court has set the trial date for March 25 of this year regardless of Kwon’s court appearance. Although rumors suggest that Kwon has made extensive efforts to avoid extradition to the U.S., it seems unlikely that this decision will be reversed. Many investors in Korea suffered losses, but the fact that they are cheering for Kwon’s extradition to the U.S. court is not something to be taken lightly.

The U.S. imposes severe penalties for financial crimes. In addition to strict criminal prosecution against Kwon, the U.S. Securities and Exchange Commission (SEC) is also pursuing a civil lawsuit against him. The estimated damages are about 54 trillion won, so the punishment is expected to be extreme, including asset forfeiture rather than mere compensation. On the other hand, Korea’s penalties for financial crimes have been relatively mild for a long time. The contrasting image of Kwon and co-founder Shin Hyun-sung appearing rather relaxed during their trials in Korea reflects the current situation. Moreover, under the current system, cryptocurrencies are inherently vulnerable to insider trading. During the Terra-Luna incident, some insiders profited from the price crash through extreme leveraged short-selling and other techniques, while the losses were borne entirely by ordinary investors. There has been no serious attempt to punish these insiders domestically.

Ultimately, for the cryptocurrency market to stabilize and protect ordinary investors while growing more soundly, a regulatory framework must be established. The beginning and core of regulation is the establishment of a tax system. In this regard, the domestic situation is worsening. The government has postponed the taxation of virtual asset investment income, originally scheduled for 2022, until 2025, and recently, this has been ignored altogether, with President Yoon Seok-yeol showing signs of abolishing the financial investment income tax entirely. This is a regression, completely contrary to the moves of advanced countries aiming to regulate cryptocurrencies under normal market rules such as ETFs. The president, inevitably sensitive to public support as a politician, may sometimes propose unreasonable policies. However, regulatory authorities must operate independently and fulfill their mission to protect the rights and assets of the people. Meanwhile, the Financial Services Commission is even discussing lowering the securities transaction tax, forgetting that the introduction of the financial investment income tax was originally a prerequisite for reducing the securities transaction tax.

Korea’s cryptocurrency market is still in a chaotic era without a central anchor. It is time for policy authorities to take action. In times of turmoil, it is when traitors and loyal subjects are distinguished.

Professor Kim Gyu-il, Michigan State University