Central Bank Of South Korea Calls For Monitoring Of “Kimchi Premium” In Crypto Prices

News, Regulation | September 11, 2018 By:

The Bank of Korea (BOK), the country’s central bank, has called for continued monitoring into local crypto markets to nullify the so-called ‘kimchi premium’ in cryptocurrency prices.

Earlier this year, cryptocurrencies, such bitcoin and ethereum, were traded far higher in the South Korean market compared to spot prices on global exchanges. BOK researchers claim that the phenomenon stems from a lack of trade engagement from mainstream financial institutions, the additional cost of transactions due to the low scalability of the blockchain system, and delays in processing transactions in cases where Korean cryptocurrency exchanges experience server overload.

“These factors prevented an elastic increase in the supply of cryptocurrency assets from foreign traders’ arbitrage through Korean exchanges,” said Kim Dong-sup, an official with the BOK’s payment systems research team. “Such an increase in supply would otherwise have met the increased local demand for cryptocurrency assets from late 2017 through early 2018.”

Following the South Korean government’s introduction of a real-name system for crypto exchanges in January of this year, Kim said most of the so-called kimchi premium has disappeared. However, he warned that if the country sees a similar upsurge in crypto asset demand in the future, the price gap (between won-denominated crypto assets and US dollar-denominated ones) will widen again.

Kim stressed the need for continued monitoring and efforts to raise public awareness to prevent local investors from going for “irrational investments based on a false hope of a price increase.”

While BOK claimed that the real-name system had quelled local demand, local news outlet Money reported that the conversion rate to the real-name verified accounts for the country’s largest four crypto exchanges – Upbit, Bithumb, Coinone, and Korbit – is only 40 percent to 50 percent. The report said that “many investors do not convert to a real-name verified account but invest only with the funds they have already deposited at crypto exchanges.”