China is clearing its crypto house at the same time that South Korea is moving its own crypto sector into a sound institutional framework. The ramifications of these developments could be significant for market players.

After the recent statement by President Xi Jinping that China should “seize the opportunity” to adopt blockchain, it has been reported that the Shanghai head office of the People’s Bank of China has issued a regulatory update about tightening control over cryptocurrencies and crypto exchanges that allow Chinese people to trade on them.

This looks like a move by the Chinese government to clean up a very messy industry before implementing an upcoming law that will be used to govern the national CBDC (Central Bank Digital Currency).

Authorities in Shenzhen have identified a total of 39 exchanges falling foul of China’s cryptocurrency trading ban. Evidence points to Beijing shutting down 173 exchanges and token issuers.

It is being reported that after clearing out the deadwood, Beijing will focus on three activities: providing virtual-currency trading services or opening virtual-currency trading places in China; providing service channels for overseas virtual-currency trading places, including services such as drainage and agency trading; and selling tokens under various names, raising funds for investors or virtual currencies such as Bitcoin and Ethereum.

Still, investors may not appreciate the soaring risk profile.

According to the Cointelegraph, 92% of institutional wallets are stored in exchanges. This raises the risk of government seizure of wallets. Most major Chinese crypto-exchanges are domiciled outside China, but their development teams are still in the country – and the wallets are managed by the development teams.

There are negative precedents for this situation – if not straight-up déjà vu.

2017: China founders, Korea floats

In 2017, the Chinese government took steps to crack down on the crypto market after a massive surge in Bitcoin prices and high participation from retail investors.

By limiting yuan deposits and withdrawals, followed by bans on initial coin offerings (ICOs), initial exchange offerings (IEOs), and other measures preventing private funding using cryptocurrencies in September, the government sent a strong message to existing crypto-exchanges.

Result? Major exchanges closed down or took shelter overseas.

There was a silver lining for South Korea. The move triggered an exodus of Chinese investors into Korean crypto-exchanges such as Bithumb, which saw a staggering fivefold volume surge in 2017.

According to Elaine Ramirez, writing in Forbes magazine, 2017 was the rocket year for the South Korea crypto industry. The sector witnessed three major positive events.

First, the first ICO was issued by a Korean financial-technology company called Blockchain OS. It finished in nine minutes in exchange for 6,900 Bitcoins. The volume of the ICO attracted a lot of interest from South Koreans.

Second, South Korea was swept by Ethereum fever, leading to local prices hitting 30-50% above the global average. Increased traffic during peak trading prices regularly brought down servers at the exchanges, where the so-called Kimchi Premium soared as high as 50% above global prices.

Third, bluechips embraced the blockchain storm. Samsung SDS joined the Enterprise Ethereum Alliance in May and Kakao Corp acquired fintech startup Dunamu to launch its own crypto-exchange, Upbit. The biggest deal was gaming giant Nexon acquiring Korbit, the country’s first Bitcoin exchange.

Seoul does the right thing

Last month, the South Korean National Assembly’s Amendment Committee on Parliamentary Affairs passed a legal amendment to the still-in-development Special Financial Transactions Information Act to force virtual asset exchanges to register with the Financial Services Commission.

While Chinese exchanges are being forced to close down, Hanbitco is launching interest services on crypto annual fixed incomes.

The Special Financial Transactions Information Act could be the Holy Grail the industry needs so desperately. It ultimately means the crypto-related industry will move out of a regulatory gray area and into the light as a regulated financial institution – like banking.

“This is expected to be the first step in the development of consumer protection and a stable market,” said Kim Jae-jin, secretary general of the Korea Blockchain Association.

With direction and guidelines set by the government, the South Korean crypto industry could flourish as mainstream adoption of cryptocurrencies gets a kick in the pants. This development could well lure foreign and traditional financial institutions into blockchain and crypto exchanges.

Nobody can predict that the rocket year of 2017 will repeat once again in Korea. But it’s hard to ignore the facts about the flight to safety by Chinese retail investors – and equally hard to ignore the Korean government’s moves to drag the Korean crypto and blockchain sectors into the mainstream.