The recent arrest of Do Kwon, co-founder and CEO of Terraform Labs, in Montenegro has brought Terra Luna back into the spotlight. The United States and South Korea are competing for Kwon’s extradition, with the Korean crypto community having a vested interest in the outcome. Some Koreans prefer that Kwon be sent to the US, believing that the punishment might be harsher there. The collapse of the Terra Luna stablecoin project caused some $60 billion to evaporate, with the longest shadow falling over Korea, where it remains today. Local media reported that the project had some 200,000 local victims.
The Terraform Labs project played a special role in Kwon’s native country, and the downfall of a prominent, Korean-born founder clearly had a psychological impact. The state of crypto regulation in Korea is not terribly friendly, and the Terra crash appears to have taken a toll on local crypto trading, though of course there were other factors as well. In the first half of 2022, the domestic virtual asset market showed a decrease of 58% in market capitalization compared to the second half of 2021, according to the FIU. The report attributed this drop to the economic toll of the Ukraine crisis, rising interest rates and decreasing liquidity, “as well as the decline in trust in virtual assets due to the Terra-Luna incident.”
Korea is one of the most powerful markets in the world when it comes to crypto. The Korean won is the second most traded national currency for Bitcoin, after the U.S. dollar, according to Coinhills. A report by Korea’s Financial Intelligence Unit (FIU) in September of last year said there were nearly seven million registered crypto users in Korea. The digital asset industry market size was nearly 23 trillion won for the first half of 2022, or close to $18 billion at current exchange rates. It dropped to 19 trillion won in the second half of the year, according to a newer report.
Unfortunately, Terra Luna was not the end of the drama. According to CoinGecko, Korea was the hardest hit by FTX.com’s collapse. Just this month, the Korean exchange Gdac was hacked for nearly $13 million. In December major crypto exchanges delisted the controversial token Wemix, leading to a loss of nearly $300 million in market cap. None of this would be reassuring to regulators and businesses who already suspected that crypto was unsafe.
In last year’s presidential election, candidates adopted crypto-friendly positions in an apparent attempt to win over young voters. The winner, President Yoon Suk-Yeol pledged to restrict taxes for crypto gains and allow initial coin offerings. But Yoon assumed the presidency in May of 2022, the very same month as Terra collapsed. “The new government can’t just go pro-crypto when all this Terra Luna happened and people are losing their assets or money, and companies are going bankrupt…and all these social problems are happening at the same time,” Hyperithm’s Lee said. “They can’t just say, we’re going to keep our pro-crypto stance. So they backed away a bit.”
Earlier this year, Korean media reported that lawmakers were working on the Digital Asset Basic Act (DABA), which collectively refers to 17 draft bills that largely focus on investor protection. At present, the focus of crypto regulation is mostly to prevent money laundering and terrorism. Korea’s AML act was amended in 2020 to include virtual asset service providers (VASPs). Korean crypto exchanges have to report to the FIU and they are obliged to do know-your-customer KYC with new clients as well as report suspicious transactions. Meanwhile, there are currently only five crypto exchanges that trade with Korean won. The government was trying to restrict the number of VASPs to make anti-money laundering (AML) regulation stricter than before, Park explains. So they set up a guideline that if you want to have a virtual asset service involving Korean won, you should set up some special category of bank account.