Author: Yuan Biao

01 Introduction

After a seven-year hiatus, the South Korean government has announced the repeal of its previous ban. It has re-allowed cryptocurrency-related companies to apply for venture capital funding. This will undoubtedly have a significant impact on the infrastructure development of the cryptocurrency sector in South Korea.

The lifting of the ban can be attributed to one person: President Lee Jae-myung, often referred to as the "Korean Gandhi." In addition to this repeal of the ban on cryptocurrency investment, it was also President Lee Jae-myung who led the South Korean people to lift the absurd martial law last December. Looking back ten months later, no one could have anticipated that the political farce in front of Gwanghwamun in Seoul that night would later give rise to the world's most radical cryptocurrency policy, the Digital Asset Basic Act. To some extent, without that night’s martial law, there would be no President Lee Jae-myung, and without President Lee Jae-myung, there would be no current lifting of the ban on cryptocurrency companies applying for VC.

What impact will the newly enacted Digital Asset Basic Act have on South Korea's financial sector? What lessons can be drawn for the Chinese government's policy decisions regarding the cryptocurrency sector?

02 Review of the South Korean Background

Before delving into these two questions, we first need to understand the current state of cryptocurrency development in South Korea. According to data from the International Monetary Fund (IMF), South Korea is the 13th largest economy in the world. By 2025, South Korea's nominal GDP is expected to be approximately $1.79 trillion, ranking 4th in Asia, behind China, Japan, and India. However, in terms of public awareness and participation in cryptocurrency, South Korea is far ahead of China, Japan, and India. So far, the number of people holding cryptocurrency accounts in South Korea has reached 16 million, surpassing the number of domestic stock investors for the first time. It is important to note that South Korea has a total population of only 50 million. This means that nearly one-third of the population is participating in cryptocurrency trading.

03 Reasons for National Cryptocurrency Trading

There are many reasons for the phenomenon of nationwide cryptocurrency trading in South Korea. Personally, I believe that, in addition to South Korea's technological maturity in the cryptocurrency field, it is largely due to changes in the social structure in recent years. Issues such as unemployment, aging, and population growth have become chronic problems for this society. Traditional investments like funds and stocks offer meager returns, and real estate is unaffordable. With a declining population, the long-term sustainability of the national pension system is also in question. The entire society has become relatively rigid, with almost no other avenues for wealth creation. Consequently, trading cryptocurrencies has become a necessary option for South Korean investors.

04 Comparison with China's Current Situation

How does the current situation in China compare to that of South Korea's social structure?

In terms of population structure, while South Korea has entered a super-aged society, China is also in a stage of deep aging. Particularly after several years of pandemic control, the sustainability of the national pension system in China faces even greater challenges. Additionally, comparing the deposit interest rates in recent years between China and South Korea, overall, South Korea's fixed deposit rates are slightly higher than those of China's renminbi fixed deposits. According to the personal deposit rates released by the Bank of China on October 1, 2024, the fixed deposit rates for the Korean won for 1 month, 3 months, 6 months, and 12 months are 2.00%, 2.20%, 2.30%, and 2.40%, respectively, while the corresponding rates for the renminbi are 1.00%, 1.05%, 1.10%, and 1.20%. The fixed deposit rates in South Korea are clearly higher than those in China. Although there is currently no comprehensive official data for this year, according to information from Heima, the annual interest rate for fixed deposits in South Korea in 2025 is expected to be around 1.2%. Based on the situation in 2024, it is anticipated that South Korea's fixed deposit rates will still be higher than those of China's renminbi.

05 Impact of the Enacted Legislation

Against this backdrop, South Korean investors, especially those aged 30 to 50, have long regarded cryptocurrency as an essential financial infrastructure. The Lee Jae-myung government has also taken a favorable stance, adopting a lenient policy towards cryptocurrencies. I believe that the Chinese government will soon relax its stance on cryptocurrency trading as well. However, the legality of cryptocurrency trading in China faces the same concerns as in South Korea—worries about speculation, money laundering, and capital outflow.

The South Korean government's cryptocurrency agenda aims primarily to prevent the outflow of Korean assets through dollar-denominated digital assets like USDT or USDC. In the first quarter of this year, the digital assets transferred overseas by South Korean cryptocurrency exchanges amounted to over $60 billion, with 47.3% flowing out through stablecoins. The newly implemented Digital Asset Basic Act establishes a regulatory framework for South Korean companies to issue stablecoins pegged to the Korean won. It also significantly lowers the barriers to entry into the stablecoin market.

So, can the promotion of a won-pegged stablecoin really stop capital outflow?

The Lee Jae-myung government's strategy to promote a won-pegged stablecoin is not about administratively intervening in South Korean investors' buying and selling of dollar-denominated digital assets. Instead, it aims to empower domestic capabilities to openly compete with USDT and USDC on the battlefield. South Korea seeks to reduce its investors' demand for dollar stablecoins by offering advantages in programmability, decentralized finance access, and 24/7 trading, all without the need for currency exchange. More importantly, this approach keeps financial infrastructure within South Korea, directing fees, custody services, and other revenues to Korean institutions rather than to Circle or Tether. This is a form of behavioral guidance rather than administrative capital control, making won-denominated options more convenient while placing financial operations under Korean regulation.

06 Lessons for China

The Chinese government has long maintained a negative attitude towards cryptocurrency and virtual assets due to concerns about capital outflow and foreign exchange control. Particularly on September 15, 2021, the People's Bank of China and ten other ministries jointly issued a notice on further preventing and addressing the risks of virtual currency trading speculation, which almost entirely denied the legality of cryptocurrency trading. However, through years of observation and research, the Chinese government's attitude has subtly changed, especially during this year's Shanghai Cooperation Organization Tianjin Summit, where stablecoin and digital currency cooperation were included in the discussion topics. However, this does not mean allowing individuals to freely participate in digital currency investments; rather, it is about exploring the application of related technologies within a compliance framework.

Years ago, the South Korean government also took restrictive measures towards this new field, prohibiting enterprises, institutions, and financial companies from opening cryptocurrency exchange accounts. However, individuals were still allowed to trade cryptocurrencies using verified real-name accounts. Institutional and corporate accounts were prohibited, and banks faced strict compliance obligations. After a few years, the South Korean government approved non-profit organizations and some public institutions to liquidate cryptocurrencies obtained through donations or seizures, but they had to use verified real-name trading accounts in Korean won and establish internal review committees.

The development of things always requires a process. Currently, China's overall attitude towards renminbi stablecoins is "strictly prohibited in the mainland, regulated pilot in Hong Kong," based on considerations of maintaining financial sovereignty and stability, with strict regulation. Specifically:

• Strictly Prohibited in the Mainland: According to the notice issued by the People's Bank of China and ten other departments in 2021, foreign stablecoins like Tether (USDT) are considered to have the same nature as virtual currencies like Bitcoin and do not have legal currency status. Related business activities are deemed illegal financial activities. This ban covers the entire chain of activities related to foreign stablecoins within the mainland, including prohibiting trading, exchange, and forbidding foreign exchanges from providing services to mainland residents, effectively severing the connection between financial institutions and stablecoin businesses. Additionally, issuing stablecoins by domestic enterprises is strictly prohibited, classified as "illegal issuance of token vouchers," and related business activities are illegal financial activities, including providing technical support for issuance activities.

• Regulated Pilot in Hong Kong: Starting August 1, 2025, Hong Kong will implement the Stablecoin Ordinance, establishing a licensing system for stablecoin issuers, requiring issuers to have a paid-up capital of no less than HKD 25 million, maintain 100% high-quality liquid asset reserves, and undergo independent custody and daily audits. Companies like JD Coin Chain have entered the sandbox testing phase, with pilot scenarios covering areas such as cross-border payments. However, Hong Kong's stablecoin business has a "firewall" preventing licensed issuers from providing services to mainland residents, and the stablecoins they issue cannot circulate within the mainland.

This "offshore pilot, strict management in the mainland" model not only accumulates experience for China in exploring stablecoin regulation but also effectively isolates the financial risks that innovation may bring. At the same time, through initiatives to promote the internationalization of the digital renminbi, China is proactively positioning itself to respond to global digital financial competition while participating in the formulation of international rules, all under the premise of ensuring financial security.

07 Conclusion

The cryptocurrency policy strategy introduced by the Lee Jae-myung government will have significant implications for the world, especially for other Asian economies, including China. Balancing domestic and international considerations is a fundamental experience of the Chinese Communist Party in governance. We have reason to believe that China's policy exploration in the cryptocurrency sector will always aim to maintain national financial security and promote high-quality economic development, carving out a path that aligns with its national conditions.

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