When people talk about illicit Korean cryptocurrency transactions, people tend to think of North Korean hackers stealing billions in bitcoin to fund the country’s nuclear weapons program.
But when South Korea’s Financial Supervisory Service (FSS) announced on Wednesday (July 27) that it was investigating $3.4 billion in illegal foreign exchange (FX) transactions that may be linked to illegal cryptocurrency transactions, they were talking about the Kimchi Premium.
In other words, they were talking about using cryptocurrencies to evade South Korea’s tough FX restrictions — using an arbitrage play that exists because of those restrictions — and possibly launder funds from China.
In these two cases, the FSS is investigating what it believes are “abnormal” foreign exchange transaction at two major banks over the past year, Bloomberg reported. Five branches of Woori Bank saw 1.6 trillion won ($1.3 billion) between May 2021 and last month, the FSS said. Eleven branches of Shinhan Bank moved 2.5 trillion won ($2.1 billion) between last February and July 4, it added.
South Korea’s Yonhap News Agency said several prosecutors’ offices are investigating the transactions as well, but added that no criminal activity has been discovered.
The Kimchi Premium
The Kimchi Premium works like this: Because it is difficult to move large sums of money into and out of Korean crypto exchanges from abroad, the price of bitcoin and other cryptocurrencies has for years been substantially higher on Korean exchanges, thanks to the strong popularity of cryptocurrencies, despite government disapproval.
That price has been as much as 20% higher, thanks to the popularity of cryptocurrencies, although recently it’s been closer to a 2.2% increase. A person buying crypto abroad and selling it for won on the Korean exchanges can make a tidy sum.
The problem is getting those profits back out of Korea, where banks have strict reporting requirements for any FX transaction moving more than $50,000 worth of won per year out of the country, and amounts over $5,000 must be reported.
Generally, banks are unlikely to approve FX transfers of funds made from selling cryptocurrencies for won, or using funds from Korean accounts or credit cards to buy cryptocurrencies abroad. This is particularly in light of growing crackdowns by authorities in the past year, which have focused on money laundering, tax evasion and price manipulations, as well as stopping the flow of money out of the country.
Moving billions of dollars out of the country — if it was generated from crypto trading — would be hard to do without filing false reports with banks as to its provenance.
Another part of the problem is that a lot of Chinese cryptocurrency miners and owners — who are now banned from buying or selling any digital assets — are selling cryptocurrency in Korea and moving fiat back across the border, raising money laundering concerns.
Leaving aside the potential violation of foreign exchange laws, what’s noteworthy about the case is the size of the transactions, particularly in a country with such tough laws on foreign exchange transactions.
In March, Sen. Elizabeth Warren, D-Mass., suggested in a Senate Banking Committee hearing that Russian oligarchs could be evading sanctions to the tune of billions of dollars using privacy coins, which are cryptocurrencies designed to evade tracking.
While she was told that the trade volume of privacy coins like Monero revealed that this wasn’t happening, what the Kimchi Premium violations show is that with planning and patience, it is possible to move large sums using smaller crypto transactions that are very hard to detect.
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