Kimchi Premium Negative in S.Korea as Trading Drops 140% After New Rules

For the first time in several years, South Korea’s “Kimchi Premium” turned negative following a drastic drop in local demand for digital assets. Data provided by Kaiko shows that the usual gap between crypto prices globally and in South Korea plummeted. This fall comes on the heels of implementing new crypto regulations that have caused a Bitcoin discount on Seoul exchanges.

Kimchi Premium Serves As A Barometer For South Korea’s Retail Interest in Crypto

The Kimchi Premium has existed and served as a good indicator of retail interest in South Korea’s digital assets. It is the difference in cryptocurrency prices between South Korean and other global exchanges and is seen mainly in Bitcoins’ price.

Usually, a higher kimchi premium indicates increased retail investment in Bitcoin by Korean investors and vice versa. A study by the University of Calgary places the emergence of the gap in 2016. It further revealed that between 2016 and 2018, the price difference average was 4.8%, with a recorded 55% high in January 2018. 

The kimchi premium usually creates a risk-free arbitrage opportunity for investors to explore. Traders can exploit this advantage by purchasing Bitcoin from international exchanges and selling it on a south Korean platform for a profit. If successfully done, the difference in prices disappears as Bitcoins’ demand in Seoul causes the price of Bitcoin globally to rise.

However, taking advantage of the arbitrage opportunity presented by the Kimchi premium is easier said than done. The presence of capital controls and anti-money laundering laws in South Korea makes the entire process extremely difficult. 

Following the global financial crisis and the European debt crisis, South Korea’s government introduced capital controls in 2010. The safeguards were put in place to limit the economy’s risk of being harmed by wild fluctuations or volatility in capital flows. Each year, the amount of money sent out of the country is regulated, and officials must approve the transfer.

Consequently, South Korean investors find it difficult to send money to foreign exchanges to purchase Bitcoin and exploit the arbitrage opportunity. Also, access to digital assets by foreign investors is limited, resulting in only South Koreans being able to use digital currencies within the country.

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New South Korea Regulations Sees Demand for Crypto Crash

Last week, the South Korean government began implementing the new travel rule for cryptocurrency based on the Financial Action Task Force (FAFT) guidelines. The recommendations, which were released to a lukewarm reception in 2021, have seen a crash in demand for digital assets.

The increasing costs of complying with crypto rules and demanding reporting requirements have resulted in a consolidation of the Korean crypto market. Big crypto exchanges like Binance and Okex have also exited the market, impacting demand negatively within the country. 

The chart above shows that the weekly trading volume on the Korean market’s “Big Four” exchanges is down more than 140% from November’s average. In comparison, BTC-USD trade volumes on the 10 top worldwide exchanges have declined only 25% during the same period. Upbit, which continues to lead the market with roughly 80% of overall trade volume, has suffered the most significant volume reduction.

Moving forward, the demand for digital assets may even drop lower. The new travel law stipulates that exchanges must report all transactions above a million Korean won (US$824). This will push away investors drawn to the anonymity offered by digital assets and likely cause demand to keep plummeting. 

Do you think the crypto industry will survive the new regulations in South Korea? Let us know your thoughts in the comments below.