A bitcoin coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris, France. Picture: REUTERS
A bitcoin coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris, France. Picture: REUTERS

Seoul — As South Korean policy makers debate whether and how to regulate bitcoin, some investors in the cryptocurrency are taking the sanguine view that the current rout will turn out to be a temporary blip, and that any ban will be easily circumvented.

South Korean policy makers said on Thursday that Seoul was considering shutting down domestic virtual currency exchanges as the new breed of market exposes users to speculative frenzy and crime.

Policy makers in countries including the US and Germany are struggling to come up with stricter regulation against money laundering and other crimes.

Responding to questions in parliament, South Korea’s chief of the Financial Services Commission said the government was considering shutting down either "all local virtual currency exchanges or just the ones who have been violating the law".

Separately, Bank of Korea governor Lee Ju-yeol told a news conference that "cryptocurrency is not a legal currency and is not being used as such as of now".

Regulators around the world are still debating how to address risks posed by cryptocurrencies, as bitcoin, the world’s most popular virtual currency, soared more than 1,700% last year.

Prices have plummeted since South Korea announced last week it may ban domestic cryptocurrency exchanges.

On Wednesday, bitcoin slid 18%. According to Bithumb, South Korea’s second-largest virtual currency exchange, the nation’s bitcoin trading price stood at 15,697,000 won ($14,690.69) at 3.14am GMT on Thursday.

On the Luxembourg-based Bitstamp exchange, bitcoin was traded at $11,750.

Hong Nam-ki, minister of the office for government policy co-ordination, said opinions on cryptocurrency trading were sharply divided within the government, but vowed to make a decision on regulations during Thursday’s parliamentary session.

South Korea’s justice minister said last week the ministry was preparing a bill to ban cryptocurrency trading, which sent bitcoin prices sharply lower and threw the market into turmoil.

The shift towards tighter regulation sparked strong reaction from many South Koreans, thousands of whom signed a petition on the website of the presidential Blue House to stop a ban on cryptocurrency trading.

On Thursday, the central bank governor said the bank had begun looking into the market’s impact on the economy.

"We have started looking at virtual currency from a long-term standpoint, as central banks could start issuing digital currencies in the future. This sort of research has begun at the Bank of International Settlements and we are part of that research."

Bending the rules

While the threats of a cryptocurrency trading ban in South Korea have scared many investors away, some veterans of the young market are defiant, saying restrictions would be relatively easy to circumvent.

Although the cryptocurrency market lost about $200 billion this week, or a third of its value, these investors — known within the community as "hodlers" after a misspelled meme that went viral during bitcoin’s early days — are used to roller-coaster rides.

China’s shutdown of local exchanges in September, for instance, caused a 50% drop in Bitcoin, but prices rebounded eight-fold to almost $20,000.

Bitcoin could be poised for a similar whirlwind this time around, some say.

"In case the government shuts down all local exchanges, investors can always go abroad and open an account there," said a South Korean student who declined to be named because of legal risks. "I can ask my friends who study abroad or travel there myself. It’s not that big of a problem."

Cryptocurrency experts say the student probably has good reason to be relaxed. A ban could discourage new market entrants, but the anonymity of buyers and sellers and the ability to move digital assets anywhere in the world with a click makes it hard to impose restrictions on existing participants without a global consensus.

Places like Singapore and Hong Kong maintain light regulations, while neighbouring Japan has encouraged a vast ecosystem of companies and investors around digital assets by pioneering a set of rules for the industry. Germany has said national restrictions may be useless.

VPNs, offline wallets

According to industry experts, the first step to circumventing a ban is hiding IP addresses from authorities via virtual private networks (VPNs).

Traders can then continue business as usual.

Decentralised exchanges, such as Shapeshift or Stellar Dex, do not require identification and can be accessed from anywhere.

Cryptocurrency wallets such as Exodus and Jaxx are linked to such exchanges, so trading and storing the assets can still be anonymous.

Authorities in countries with strong legal protections may need a warrant to check computers or smartphones for proof of such activity.

Even then, unless caught in the act, the holder can claim no trading has taken place since the legislation was approved and has forgotten the password for the wallet.

Some decentralised exchanges offer derivative products that allow betting on the price of a cryptocurrency against a fiat currency, including the Korean won and Chinese yuan. But cashing out in fiat is not possible on such exchanges.

An option in that case is to trade all cryptocurrencies for a top one such as bitcoin, Ethereum or Litecoin, and sell it at one the 2,064 crypto ATMs in 61 countries, although the transaction fees can exceed 10%.

If need be, coins can be stored on offline "wallets" the size of a USB stick.

Alternatively, holders can open bank accounts in countries that have not banned bitcoin, then join a local centralised exchange where they can trade cryptocurrencies for fiat.

"I hold everything in a hard wallet the size of my thumb. I have copies of my private keys in a safe. I have accounts on four exchanges on three continents. If any government wants my money, good luck to them," said a Hong Kong-based investor who claims to hold "about $1m" in various cryptocurrencies.

Crossing borders

A 30-year-old nurse in Seoul said she had already switched to Hong Kong-based exchange Binance before the government’s warnings hit the market. Company officers at Seoul-based exchanges say, anecdotally, such moves have accelerated.

"All this could lead to serious money outflow and only the government is not aware of it," one officer said, requesting anonymity.

South Korea accounts for between 5% and 15% of daily bitcoin trading. The value of all bitcoins is about $200bn.

If opening accounts overseas proves difficult, friends, family or the local Bitcoin community can help. Another option is to find someone with access to an exchange — preferably using encrypted social media apps such as Whatsapp or Telegram — and sell to them at a discount. But fraud is a risk.

"There could be a black market where people who can cash out offshore can pay you in won for your Bitcoins," said Aurelian Menant, chief executive of Hong-Kong based exchange Gatecoin.

But that left the door open to "dodgy stuff", Menant said, and the fear of scams in the aftermath of a ban could deter new investors, potentially shrinking Korean trading volumes "from billions to millions".