The Takeaway:

• Young crypto investors have become a major force in South Korea's March 9 election.
• Real policy details will come post-election once a new administration comes to power.
• Taxes, investor protections, the travel rule and policies to bring crypto companies back lo South Korea are likely to be in the cards.

All of South Korea’s presidential candidates have announced crypto-friendly stances in a bid to win over young voters ahead of the election next month.

Real estate is the biggest issue on voters’ minds in South Korea now as young people under the age of 24 earn salaries of around KRW 2.6 million (US$2,176) a month, face expensive Seoul rent and have no hope of buying an apartment. Many of them have turned to stocks and crypto.

According to Edward Hong, head of platform at crypto venture capital firm Hashed, there are more than 5 million individual crypto accounts across the country’s top three crypto exchanges. Hong estimates that about 10% of this year’s voters are crypto investors.

Around 91% of South Koreans own a smartphone. Internet penetration is 96.5%. Gaming is popular, and the average person has some level of trading experience. Combining all that forms a population that is highly receptive to crypto assets, and a swath of Gen Z voters have emerged as a serious electoral force in the country.

Political calculations

Candidates have offered little so far in terms of concrete policies about regulation crypto, in contrast to their detailed pledges on fixing housing issues. They have, however, made statements about their support for the industry.

“They are incentivized to say more crypto-friendly statements or not say anything negative, as that might lose them votes from the young generation,” said Steve Lee, an investor at BlockTower Capital, a hedge fund focused on crypto asset and blockchain technology.

In September, the current administration proposed a 20% tax on crypto gains made in a one-year period over KRW 2.5 million (US$2,122), but had to walk that back after backlash from crypto investors.

While there have been drafts for blockchain-specific legislation that would require investor protection and disclosure rules, no law has been passed, and the lack of clarity is deterring potential institutional investors.

“There has been progress in 2021, but regulatory guidance on crypto investment still needs more clarity,” Lee said.

Jin Kang, head of legal at Hashed, said the lack of regulation is a “calculated risk” to make sure that the ruling party can attract voters with its proposal of a regulatory framework.

There are 14 crypto-related bills circulating at the moment. "Something has to happen after the presidential election," Harold Kim, former director of Korea Blockchain Association, said.

Bringing companies back

Candidates have pledged to bring crypto companies back to South Korea. There is now a de facto ban on initial coin offerings (ICOs) as a result of a notice posted on the Financial Services Commission’s website in 2017, though it never made it into legislation or regulation.

After the notice, crypto-related companies moved to Singapore or other jurisdictions so that they could conduct business without regulatory uncertainty.

Kang said that rescinding the notice won't be enough to attract companies to move back. He said only a “more comprehensive package” will get people to bring their crypto businesses back to South Korea, which might include tax incentives coupled with educational or job-related incentives and benefits for employing locals.

So far, more comprehensive policy packages have been issued only at the local government level. The city of Busan, for instance, has been designated as a regulation-free blockchain special zone, which allows projects to test technology and services.

Consumer protection

Recent headlines in South Korea have highlighted the issue of insufficient protection for crypto investors.

After gaming company WeMade announced that it would launch play-to-earn games, its stock price soared.

“This shows the level of NFT (non-fungible tokens) hype among retail investors, but also how listed companies or brand names drive hype,” Lee said.

Last month, after news spread that WeMade was selling off its WEMIX tokens in tranches, its token price fell sharply as the company faced allegations that it was enriching itself on the back of retail investors.

In its white paper, WeMade stated that 74% of its tokens would be used to support the growth of its ecosystem. It has said that its intention was for the token to become an in-game currency for at least 100 games.

At the present time, there is no clear standard for disclosure or any standard on how clear a company should be about its holdings. Chang Hyun-guk, WeMade’s CEO, has pledged to make transactions more transparent and compensate investors.

Many of South Korea’s largest entertainment and gaming companies have indicated their interest in the crypto sector, saying at annual and shareholder meetings that they will pursue NFTs or play-to-earn games.

Some industry observers, meanwhile, have argued against blaming WeMade; instead, they cite the regulatory vacuum.

Exchanges

The consolidation of exchanges due to new rules means that users can use a government-issued currency at only four exchanges in South Korea. Upbit, with its partnership with app-based lender K bank, is the largest crypto exchange in South Korea with about an 80% market share.

Still, there are uncertainties over listing criteria.

“I don’t think there are many tokens that could meet stock market standards,” Kim said. “We’d like to see a set of rules.”

Some new bills require that token issuers be in contact with exchanges. For example, with ether, an exchange would have to seek approval from Ethereum co-founder Vitalik Buterin and his team. Some criteria also require that a financial history be provided for tokens as it is for stocks.

There is also uncertainty over the travel rule and how prices will be registered, information verified and infrastructure put in place.

Moreover, some exchanges are suffering as difficulties in moving funds overseas means they have a presence only in South Korea.

The candidates and their positions

Yoon Seok-youl

People Power Party candidate Yoon Seok-youl made an appearance at the 2022 Virtual Assets Conference last month, where he spoke of the need to overhaul unreasonable regulations. Yoon has promised a shift to using negative regulation to regulate the virtual asset market.

Yoon argues that infrastructure should be ready before a crypto tax is announced. Last month, he pledged to make the no-tax threshold for crypto gains the same as that for stocks (KRW 50,000 million or US$42,450). He said he will allow initial exchange offerings and plans to set up a digital industry promotion agency. The government will be able to confiscate profits obtained through market manipulation, he said.

Lee Jae-myung

Democratic Party candidate Lee Jae-myung has touted the possibility of bringing initial coin offerings back. He visited Upbit's offices last month. Lee has released NFTs and said he would accept crypto for his campaign donations.

He has set up a gaming and metaverse special task force and has spoken about making the country a crypto hub, pledging to create a national crypto asset and distribute that to the public. He is calling that proper procedures be put in place before the government rolls out a crypto tax.

Ahn Cheol-soo

People Power Party candidate Ahn Cheol-soo has gained votes following scandals involving the top two candidates. He has pledged to make South Korea into a "sci-tech" nation and said that he wanted his party to run on blockchain technology.

He has said that listing standards should be clearer for tokens and that investors should be able to access information and analysis about what they are buying.