South Korea’s crypto scene emerges from Terra Luna’s shadow

Terra Luna is back in the news as the US and South Korea battle over the extradition of Terraform Labs co-founder and CEO Do Kwon, a Korean national who was recently arrested in Montenegro. The Korean crypto community is likely more invested in the outcome, but some actually prefer Kwon to be sent to the US because the punishment may be more severe there.

The collapse of the Terra Luna stablecoin project reverberated around the world, causing around $60 billion to evaporate. But the longest shadow fell over Korea, where it remains today.

The 2022 crash was all over the local media, which reported that the project had around 200,000 local casualties. “Even my grandfather knew about Luna,” said SungMo Park, head of Korea business development at Polygon Labs. Projects built on top of Terra became homeless, at least temporarily. A once pro-crypto presidential administration began to seem much less enthusiastic. To date, the state of crypto regulation in Korea is not very friendly.

Terraform Labs was based in Singapore, not Korea, but the project played a special role in Kwon’s home country. When I visited Seoul a few months ago, memories of the crash were vivid. I heard of people selling their homes to invest in Luna, as well as speculation that if Kwon had returned to Korea after the crash, he would likely have been killed.

The downfall of a prominent, Korean-born founder clearly had a psychological impact. “Do was a very young Korean leader who made a big change in the global scene. There was no software company in Korea that made that kind of impact on a global level,” said Jiyun Kim, CEO and co-founder of DSRV, which ran a Terra- validator in Korea. “He was kind of the North Star for Korean crypto entrepreneurs.”

“Koreans don’t really think Koreans are capable of going global,” said Lloyd Lee, founder and CEO of Hyperithm, a digital asset management firm based in both Seoul and Tokyo.

“There were two stars who actually broke that belief. One was [the K-pop boy band] BTS, the other was Do Kwon.”

When it comes to crypto, Korea is one of the most powerful markets in the world. The Korean won is the second most traded domestic currency for Bitcoin, after the US dollar, according to Coinhills. A report by Korea’s Financial Intelligence Unit (FIU) last September said there were nearly seven million registered crypto users in Korea. The market size of the digital asset industry was nearly 23 trillion won for the first half of 2022, or close to $18 billion at current exchange rates. It fell to 19 trillion won in the second half, according to a recent report.

The Terra crash appears to have taken a toll on local crypto trading, although of course there were other factors as well. In the first half of 2022, the domestic virtual asset market showed a 58% decrease in market value compared to the second half of 2021, according to the FIU. The report attributed this drop to the economic strain from the Ukraine crisis, rising interest rates and declining liquidity, “as well as the decline in confidence in virtual assets due to the Terra-Luna incident.”

Unfortunately, Terra Luna was not the end of the drama. According to CoinGecko, Korea was the hardest hit by FTX.com’s collapse. This month alone, the Korean stock exchange Gdac was hacked for nearly $13 million. In December, major crypto exchanges delisted the controversial token Wemix, causing a loss of nearly $300 million in market capitalization. None of this would be reassuring to regulators and businesses who already suspected crypto was unsafe.

The Terra Luna crash, among other factors, also appears to have had a political effect. In last year’s presidential election, the candidates took crypto-friendly positions in an apparent attempt to win over young voters. The winner, President Yoon Suk-Yeol promised to cap taxes on crypto winnings and allow initial coin offerings. His victory came with a flurry of media headlines suggesting a crypto-friendly administration, with the price of at least one Korean crypto project rising with these high hopes.

But Yoon took over the presidency in May 2022, the same month 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 off a little bit.”

Earlier this year, Korean media reported that lawmakers were working on the Digital Asset Basic Act (DABA), which collectively refers to 17 bills largely focused on investor protection. So far, none of these bills have passed. “We were on the way to create some new crypto legislation, especially after the new presidential administration started. But so far, there has been almost no new regulation, only discussions in parliament,” said Jongbaek Park, a partner at Bae, Kim and Lee.

Currently, the focus of crypto regulation is mostly to prevent money laundering and terrorism. Korea’s AML law was amended in 2020 to include virtual asset providers (VASPs). Korean crypto exchanges must report to the FIU, and they are obliged to do know-your-customer KYC with new customers, as well as report suspicious transactions.

Meanwhile, there are currently only five crypto exchanges that trade the Korean Won. The government tried to limit the number of VASPs to make anti-money laundering (AML) regulations more stringent than before, Park explains. So they set up a guideline that if you want a virtual asset service involving Korean won, you should set up a special category of bank account.

“The Korean government tends to put too much emphasis on risk prevention, such as investment protection, market stability protection, rather than encouraging possible innovative effects for the market or society,” Park said.

“AML regulation is good for getting rid of bad actors, such as those doing money laundering or terrorist financing,” Park added. “The problem is that the government has not legislated any other regulation.”

The arrest of Do Kwon has helped bring cryptoassets back into the regulatory spotlight, expediting a long-delayed process, Coindesk Korea reported. One crypto-related bill could be voted on as soon as this month, and another could be considered next month. The legislative proposals deal with the protection of user deposits as well as prohibitions against the use of undisclosed information, manipulation of market prices and illegal transactions.

“Last year, the Tera-Luna scandal was still unresolved, followed by the FTX scandal. The pace of change in the digital asset market is very fast, so related bills should be passed carefully according to the situation,” Yoon Chang-hyun, a member of the National Assembly, told CoinDesk Korea in late March.

“The Digital Assets Trading Bill (currently pending in the National Assembly) is expected to be passed in the second quarter of this year,” Yoon said. The first step is to pass a transactional law, and the second step is to pass a basic law.”

There was one sign of progress in February, when Korea issued guidance on security token offerings, or STOs. “The Korean government did not want to allow token-type securities in general, although they had designated regulatory sandboxes for four STO projects. These guidelines are a big change,” Park explained. But a closer look at the guidelines shows that they are not as progressive as they first appear.

“The fact that the FSC announced STO guidelines is good news for crypto. But if you go into the details of that guideline, they have a restrictive stance on the scope of STOs. For example, they essentially exclude public blockchains,” Park said .

It is not uncommon for a country’s crypto trajectory to be shaped, at least temporarily, by traumatic events. In Japan, Mt. Gox and Coincheck exchanges regulators and cast several years of chill over the domestic crypto community. But those same events also spurred Japan to draft some of the clearest crypto regulations in the world. Meanwhile, the United States is still reeling from the implosion of FTX, which gave a highly visible black eye to an industry that already had many critics in Washington. Partly due to recent SEC crackdowns, some crypto companies are now avoiding the US.

The dust from the Terra Luna crash hasn’t quite settled in Korea, although Kwon’s arrest moves this story a bit closer to its conclusion. Several told me that after the crash, traditional Korean companies became more wary of being associated with crypto. “Before Terra, all the big companies were riding the momentum. Investment banks were actually inviting us to give them seminars on crypto ETFs or how to break into the crypto market. But I guess now the attention has become a bit selective,” says Hyperithm’s Lee. “Not all companies are interested in crypto anymore.”

It’s hard to know where Korea will ultimately end up with crypto regulation, but the retail market is still showing its might. Korea played a role in the recent rise of the XRP token, to give just one example, as XRP trading volume increased to billions of dollars on top local exchanges UpBit, Bithumb and Korbit.

“When the next bull market comes, retail traders will be back. I had friends ask me at $60,000 bitcoin if they should sell their house to buy bitcoin. This all or nothing mentality is not uncommon in Korea,” says Anthony Yoon, Managing Partner at ROK Capital.

Some former members of the Terra community found other chains. And in the crypto industry, optimism remains strong. “Right now, the wave is game companies,” SungMo Park said. “And I think the next wave will be entertainment. We are good at games and entertainment, and we have all the prerequisites to succeed.”

In other words, key parts of the Korean market are already moving past Terra Luna’s demise. It may take some time before we see crypto-friendly regulation, if it happens at all. But Korean builders and traders are not all dwelling on the past.

“People tend to quickly move on to the next hype or the next event, to keep up with the fast-paced Korean trends,” said Erica Kang, founder and CEO of KryptoSeoul, a community building team in Korea.

“When a huge, devastating crash happens, of course people are shocked and negatively affected, and they criticize harshly. But then, maybe weeks later, they’re back in the game.”