[Opinion] Cryptocurrency Boom, Investor Protection and Financial Supervision

Professor Kim Hong-beom, Department of Economics, Gyeongsang National University

Isaac Newton, the pioneer of modern science who established the law of universal gravitation, was also an outstanding financial investor of his time. However, he suffered significant losses in his later years due to the collapse of the South Sea Bubble in September 1720. Newton’s sigh from 400 years ago, "While the movements of celestial bodies can be calculated, the madness of people is beyond measure," naturally resonates. It makes one wonder what will happen after the recent cryptocurrency frenzy.

Cryptocurrencies are assets issued according to predetermined computer protocols and are not the ultimate debt of anyone, as the issuer cannot be identified. For various reasons, there is only the expectation among people that their value will rise. The Economist’s remark that "due to the subtlety of Bitcoin, whose intrinsic value is very difficult to determine, any value seems plausible to its ardent fans" hits the mark.

All asset bubbles inevitably come with various illegal activities. In reality, cryptocurrency operators are proliferating, and fraudulent activities such as unauthorized fundraising, unfair trading, and scams are rampant. Yet, the government remains strangely silent. The responsible ministry is undecided, and related laws are insufficient. Apart from the amendment of the Enforcement Decree of the Act on Reporting and Using Specified Financial Transaction Information to prevent money laundering related to cryptocurrencies (March 2021) and a Financial Services Commission press release to alert investors (April 2021), no measures have been taken in the past six months.

At the end of April, during a National Assembly Committee on Finance meeting, the Financial Services Commission’s inadequate response was criticized. The chairman’s reply revealed the financial authorities’ defensive logic: since cryptocurrencies are neither currency nor financial products, approaching them from the perspective of investor protection might instead stimulate a "speculative frenzy," and losses from speculation are entirely the responsibility of individual investors. This is an unconvincing argument. The current bubble is caused by individuals flocking in increasing numbers amid regulatory gaps, trying to ride the rising market following others. What the market needs now is investor protection from illegal activities and fraud, not compensation for losses. This will contribute to market normalization rather than encouraging speculation.

This point is easily confirmed by the experiences of overseas regulatory authorities. For example, the UK’s Financial Conduct Authority (FCA) has established regulatory consistency and protected investors by regulating security tokens among cryptocurrencies as equivalent to existing securities for the past two years. The FCA still frequently warns investors that "they must be prepared to lose their entire investment." Japan’s Financial Services Agency, which recently shifted from promoting the cryptocurrency market to strengthening supervision for investor protection, is also a good reference case.

The government (especially the Financial Services Commission) cannot be unaware of these overseas trends. Ultimately, it seems the government had almost no policy will to supervise cryptocurrencies from the start. Otherwise, there is no other explanation for the government’s passive stance. As many have pointed out, is the government’s current inaction an implicit political calculation to appease young people and the lower-income class, who have been unfairly turned into sudden paupers due to soaring real estate prices?

Current financial supervision is completely subordinated to politics. Meanwhile, the financial order in our society has greatly deteriorated. Like monetary policy, independence from politics is key for financial supervision. In this regard, the Bank of Korea should once again take the lead in financial supervision. This aligns with the global trend emphasizing the central bank’s integrated role in financial stability.

Kim Hong-beom, Professor of Economics, Gyeongsang National University

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