[Twisting Bitcoin] Did Elon Musk Violate the Capital Markets Act?

Ambiguous Musk's Actions in Relation to Capital Markets Act Violations
Legal Experts: "No Confidence in Winning Even If Musk Is Taken to Court"
What Musk Left Behind... Challenging Regulations, Urgent Investor Protection, and Contradictions in the Cryptocurrency Market

The cryptocurrency craze is sweeping across the globe. It is even compared to a so-called 'mania.' However, the more intense the mania, the more necessary it is to pause and observe. If problematic aspects are swept away along with the hype, they are bound to resurface as bigger issues someday. This is a time to calmly reflect on the cryptocurrency market, a moment to 'Twist Bitcoin.'

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] At the center of the frenzy surrounding Tesla stocks and the representative cryptocurrency Bitcoin was Elon Musk, CEO of Tesla. He is known for actively communicating through social networking services (SNS) such as Twitter. He also actively engaged in controversial issues. During the GameStop incident at the end of January, when individual investors united against short sellers, Musk said, "Short selling is a scam."

The same applies to Bitcoin. Since January, Musk has consistently supported Bitcoin, expressing regret for not having bought it earlier. Consequently, Tesla and Bitcoin moved like a joint destiny. When Tesla announced on February 9 that it had purchased approximately $1.5 billion (about 1.6762 trillion KRW) worth of Bitcoin, Bitcoin rose by 17.05%. Furthermore, Tesla established a payment system allowing Tesla products to be purchased with Bitcoin.

Recently, Musk shocked Bitcoin investors by revealing in Tesla's first-quarter earnings report that the company had sold 10% of its Bitcoin holdings. Although Tesla made a capital gain of $110 million, Bitcoin investors complained that Musk had driven up Bitcoin prices and then took profits for himself. It was like being stabbed in the back by the trusted Musk.

Some argue that if his actions had taken place in the stock market rather than the cryptocurrency market, he would have been punished. However, to determine whether Musk's words and actions regarding Bitcoin this year are punishable, one must examine the Capital Markets Act, which regulates stock price manipulation and unfair trading. If Bitcoin were truly considered a stock, would Musk have violated the Capital Markets Act?

To fall under Article 176 of the Capital Markets Act, false information must be conveyed...

First, Article 176 of the Capital Markets Act. Article 176 prohibits price manipulation, one of the most frequent criticisms directed at Musk.

However, the consensus among legal experts is that Musk did not violate Article 176. To fall under Article 176, one must transmit or disseminate false information, but Musk did not provide false information regarding Bitcoin. This holds true even considering that Bitcoin has yet to establish a complete entity. Legal expert A said, "What Musk said was an assertion, and it is difficult to judge it as false in terms of factual content." In fact, Musk introduced himself as a "Bitcoin supporter" and made claims such as "holding Bitcoin is better than holding fiat currency when real interest rates are negative," which are assertions rather than statements of fact.

He also never engaged in false trading. He disclosed the $1.5 billion purchase through a public announcement, and the recent sale of 10% of Tesla's Bitcoin holdings was revealed in the first-quarter earnings report. A said, "Musk did not directly intervene in the cryptocurrency market by releasing nonexistent quantities or making purchases that did not actually occur, nor did he place false orders."

Can he avoid the more comprehensive Article 178 of the Capital Markets Act?

Article 178 of the Capital Markets Act, overseen by the Securities and Futures Commission under the Financial Services Commission, regulates extensively.

However, there is a more broadly applicable provision than Article 176: Article 178 of the Capital Markets Act. Article 178 prohibits unfair trading practices, market disorderly conduct, and unfair acts, serving as a general provision. Simply put, Article 178 broadly regulates unfair acts occurring in the stock market.

There is a precedent similar to Musk's actions that falls under Article 178. The representative case is the '2015Do760' ruling made on April 7, 2017.

At that time, the defendant, who was active as a securities broadcast expert, recommended a stock on a broadcast program while hiding the fact that he had already purchased the stock. He did not provide false information when recommending the stock. After the stock price rose, he realized a profit of about 3.7 billion KRW. The Supreme Court ruled that although there was no regulation prohibiting front-running in similar investment advisory services at the time and viewers were expected to invest based on their own judgment, the defendant was guilty. Recommending a purchase without disclosing conflicts of interest was considered an unfair means, plan, or device under Article 178, and using his status as a securities broadcast expert to give the impression of an objective recommendation was also deemed an act of deception.

As mentioned earlier, Musk did not disseminate false information about Bitcoin but did directly or indirectly influence Bitcoin prices. Also, there are no regulations prohibiting front-running in the cryptocurrency market, and investors made their own judgments based on Musk's Twitter posts. After prices rose, profits were realized.

Nevertheless, legal experts say it is difficult to consider Musk as falling under Article 178 because he disclosed the fact of front-running. Legal expert B explained, "To fall under the unfair means, plan, or device stipulated in Article 178, the fact of front-running must be concealed, but Tesla publicly disclosed its Bitcoin purchases, so it is hard to see this as a violation of the Capital Markets Act."

They also say it does not constitute the use of deception. B said, "Tesla is not a company operating investment advisory services, and Musk is a famous figure but not an investment expert," adding, "He is even further removed from the scope of Article 178." Furthermore, B added, "If this case were brought to court, I am not confident of winning."

What Musk left behind in the cryptocurrency market

[Image source=Yonhap News]

Ultimately, Musk's actions demonstrate that even if the cryptocurrency market enters the regulatory framework, it will be difficult to regulate. Ambiguous situations may frequently arise, and because anyone can easily create cryptocurrencies, the government cannot inspect each one individually. Professor Hong Ki-hoon of Hongik University's Business Administration Department said, "Countless cryptocurrencies are created every day, so government monitoring is practically impossible," adding, "It would be good to prevent problems in advance, but strong post-facto measures comparable to those in the stock market, such as strict penalties, are necessary."

However, it also suggests that investor protection is urgent because victims can be produced by the words of celebrities. Price manipulation or unfair trading practices can be detected in the stock market, but the cryptocurrency market is currently left unattended. Professor Lee Byung-wook of Seoul School of Integrated Sciences and Technologies explained, "Unlike other assets, the cryptocurrency market operates like a stock market, so state intervention is necessary to protect investors."

Above all, experts point out that Musk exposed the contradictions of cryptocurrencies. The fact that cryptocurrencies surge or plunge based on his words itself indicates that the current direction of the cryptocurrency market is closer to speculation than technological development or innovation. Professor Lee said, "The rapid rise of Dogecoin, which has no intrinsic value, shows that the cryptocurrency market is in an abnormal state," adding, "Musk's actions have become a trigger revealing the illusions and realities of the cryptocurrency market."

This content was produced with the assistance of AI translation services.