Crypto accounts for most foreign exchange violations in South Korea

Quick Take

  • There have been $1.1 billion in crypto foreign exchange transaction violations since January.
  • Many of the crimes are thought to be linked to the practice of ‘hwanchigi’ in order to exploit the kimchi premium.  

Financial crimes using cryptocurrencies are on the rise in South Korea.

About 75% of violations of the country’s Foreign Exchange Transactions Act so far this year involved crypto, according to a report on Wednesday, accounting for about 1.5 trillion won ($1.1 billion).  

Many of the crimes involved individuals circumventing banks in making overseas transactions using cryptocurrencies. Seoul Daily News referred to the practice of illegally transacting funds between South Korea and overseas as “hwanchigi.”  

Hwanchigi has also been linked to an arbitrage play exploited by some traders, known as the “kimchi premium.” This is the gap in cryptocurrency prices on Korean exchanges versus exchanges globally. It typically affects bitcoin.

As seen above, bitcoin is trading at $21,766 on Korean exchange Upbit, while its current price on Coinbase is $21,632 – the premium typically tightens in bear markets. In April 2021, the premium was a whopping 14%, as bitcoin hit $66,000 on Korean exchanges versus $57,000 on Coinbase. 

"There are blind spots in the digital asset-related laws not yet properly prepared, but the crime scale is getting bigger, so close supervision of financial and investigative authorities is required," Rep. Min Byung-deok told Seoul Daily News. 

South Korean traders can only profit from the premium by buying bitcoin abroad and reselling it on exchanges in South Korea – leading to violations of the Foreign Exchange Transaction Act. Furthermore, Korean crypto exchanges don't accept foreign clients due to local regulations, making it hard for overseas traders to arbitrage the premium.

The Block Research analyzed the kimchi premium in 2021, as it rose above 10%.

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