The investigation detained 49 suspects of illegally withdrawing foreign currency and profiting from speculation in virtual assets using the so-called $305 million kimchi premium.
A spokesman for the Supreme Prosecutor’s Office of the Republic of Korea said that on July 25, all 49 indictments in the case of fraud and speculation in virtual assets were submitted to the judiciary.
Investigative actions were carried out in cooperation with customs and the Financial Supervision Service (FSS). The main target of law enforcement agencies was speculators who used the so-called “kimchi effect” when, against the backdrop of a surge in domestic investment in virtual assets, their price in the domestic market exceeds the price in foreign markets.
The kimchi premium is the difference between the price of bitcoin on South Korean crypto exchanges and the world (named after the local cuisine). Due to the closed nature of the South Korean financial system, market makers do not have the opportunity to arbitrage and equalize the price. As a result, unrestrained growth of quotations on local exchanges can be observed. At the beginning of 2018, this figure reached 54%, after which the cryptocurrency market began to collapse. Against the backdrop of a regulatory investigation launched in 2022 and the collapse of the crypto market, the size of the kimchi premium has fallen sharply. At the beginning of 2022, it reached 21.5%, and by the summer it dropped to 1.6%.
In August 2022, the Financial Supervisory Service instructed regulators to study the activities of a number of financial intermediaries that provide services for the acquisition and sale of digital assets, and most importantly, the extent to which they are involved in creating the “Kimchi effect”. The reason for the investigation was the massive withdrawal of foreign currency from South Korea and the explosive growth in the volume of cross-border transfers.
On paper, speculators sent virtual assets to carry out transactions on the cryptocurrency exchange, but in fact they misled users and used the price difference for personal enrichment, as well as illegal withdrawal of funds abroad, law enforcement officers assure. According to the prosecutor’s office, profits of speculators could reach from 3% to 20% of the amount of each transaction.
“We will take strict measures to ensure that national wealth does not flow away due to speculative trading in virtual assets, and that bona fide crypto investors do not suffer damage,” said a spokesman for the Supreme Prosecutor’s Office.
Earlier, the Association of Large Cryptocurrency Exchanges of South Korea (DAXA) announced the launch of a system that notifies crypto investors about abnormal deviations in the prices of digital assets.
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