CEO of a FinTech Startup Arrested for Arbitrage of Cryptocurrency

May 31, 2018

CEO of a promising South Korean FinTech startup was caught with many foreign ‘arbitrages’ of cryptocurrencies to earn profit for the future and was arrested as a result. A corresponding company is at a state where it may have to shut down its business. Industries are reacting to this news by saying that there is another unfavorable condition related to cryptocurrency.
Some are claiming that South Korean Government must present a clear guideline as regulations on illegal exchanges that abuse cryptocurrencies are ambiguous.
According to industries, CEO of a promising South Korean FinTech startup, which became a member of Korea FinTech Industry Association recently, was arrested under a suspicion of violating Foreign Trade Act.
This company is a startup that has been preparing a wire transfer business based on blockchain. However, it seems that it felt into an arbitrage trap as South Korean Government is practically considering blockchain-based wire transfer businesses illegal and did not approve this company’s business.
CEO of this company earned future profit by buying Bitcoins from foreign countries at a lower price than South Korea and re-selling them in South Korea. CEO of this company normally earned 20% of profit and sometimes up to 40% of profit.
Although the CEO started with small amount at first, he was arrested for a suspicion of an illegal exchange when size of his trades had begun to grow bigger and had led to continuous profits.
When price of one Bitcoin was $9,275 (10 million KRW) in South Korea earlier this year, price of Bitcoin in Vietnam and China was between $5,565 and $7,420 (6 million KRW and 8 million KRW).
Arbitrage indicates a way of purchasing coins from foreign cryptocurrency exchanges where prices of coins are cheap and wire-transferring them to wallets from South Korean exchanges where market values of coins are set at high due to premium and selling them. Arbitrage was rampant at the end of last year when 40 to 50% of so-called ‘Kimchi Premium’ was added due to cryptocurrency frenzy in South Korea.

CEO of a FinTech Startup Arrested for Arbitrage of Cryptocurrency

Although arbitrage looks simple, it is not easy to actually earn profit from it. First of all, an account needs to be opened through a foreign exchange and a financial method that can be used in that specific country. Means of inserting dollar-based coin called Tether (USTD) in the middle is also often used.
Even when a foreign bank account is opened or even when there is a partner in a foreign country, there is a chance that one can violate Foreign Trade Act when he or she wire transfers more than certain amount. Amount of commission is not cheap either. Although this is the reason why foreign wire transfer services based on cryptocurrencies have appeared, they have reversed into Kimchi Premium.
Comments on arbitrage or relevant ways are still shared amongst online communities related to cryptocurrency or Steemit.
On one comment that was left in January, a person earned $223 (240,000 KRW) in just one hour by purchasing $927 (1 million KRW) worth of Bitcoins from a foreign exchange through a credit card and selling them in South Korea. Although commission of using a credit card was 4%, he or she was able to make profit through 30% of Kimchi Premium.
Another user sent $9,000 to a bank account of an acquaintance, who is from the U.S., through Kakao Bank’s wire transfer service at the end of last year when premium was almost at 20%. However, this user actually lost money due to disappearance of premium as it took 4 days to send $9,000 and another 12 hours to receive coins.
Ambiguous parts occur when Foreign Trade Act is applied to cryptocurrencies.
According to Foreign Trade Act (Article 8, Clause 1), only financial companies (banks and others) and companies that have certain amount of capitals, facilities, and manpower and are registered through South Korean Government can carry out foreign tasks such as wire transfer to foreign countries. Because illegal exchange is a trade that does not go through a bank, it violates Foreign Trade Act.
Korea Customs Service announced that a reason why arbitrage of cryptocurrency is illegal is due to ‘illegal exchange’ and not ‘cryptocurrency’. Because cryptocurrency is not defined legally and its trade procedures are not regulated, it cannot be sanctioned through Foreign Trade Act and others. Korea Customs Service explained that moving cryptocurrency in and out of South Korea itself is not illegal.
Staff Reporter Gil, Jaeshik | osolgil@etnews.com & Staff Reporter Park, Jungeun | jepark@etnews.com & Staff Reporter Yoo, Seonil | ysi@etnews.com

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