Ethereum and bitcoin dropped after South Korea banned domestic initial coin offerings and margin trading in cryptocurrencies.
The Financial Services Commission in Seoul said all forms of ICOs are prohibited in the country, including projects that share profits, rights, dividends, and other “coin-style” offerings, according to a statement. The commission also banned the practice of loaning funds to trade currencies including bitcoin and ethereum, according to an official who clarified the statement. Ethereum fell about 6 percent.
It’s the second major blow to cryptocurrencies this month, after China similarly banned ICOs and later all cryptocurrency trading. Public interest in cryptocurrencies has surged this year, prompting officials to issue warnings about an overheated market and fraudulent activity. ICOs have been used to raise more than $2 billion this year, with some startups seeing it as a cheaper and faster alternative to venture capital for raising money. But the lack of oversight has attracted criminals, with some estimates showing about 10 percent of all ICO funds being stolen by thieves.
“They saw that the best practice was just to ban it before allowing any major crisis to occur, which would have impacted a lot of retail investors there,” said Thomas Glucksmann, head of marketing at Hong Kong-based bitcoin exchange Gatecoin. “Similar to China, they probably didn’t want to ban it, but they didn’t want to take any risk about it getting out of hand.”
The announcement triggered a sell-off in crypto markets. Ethereum, which has become a platform for most ICOs, dropped 5.7 percent, according to Coinbase. Bitcoin fell as much as 3.5 percent. Ethereum and bitcoin are often used to buy into ICOs.
“The majority of ICO tokens are being issued through the ethereum platform,” said Glucksmann. “At any sign of vulnerability, the first reaction would be a mass selloff in ether. That’s why the price of ether is susceptible.”
The government plans to investigate any violations and deal with them strictly even before its measures are legislated, it said in the statement.
Prosecutors in South Korea have recently caught four would-be cryptocurrency traders who illegally raised 25 billion won ($22 million) from 1,000 investors in a pyramid scheme growing in scale, the South Korea commission said. This month authorities also indicted four people on charges of illegally trading cannabis using bitcoin, the commission said.
South Korea also sees bitcoin as potentially vulnerable to North Korean hacking. Its national police agency said this week it confirmed North Korean hackers tried unsuccessfully to hack four bitcoin exchanges using emails containing malicious codes between July and August.
Countries including the U.S., Canada, Singapore and Hong Kong have also issued warnings about ICOs this year, although none has gone so far as to ban the practice. “It would shock me if you don’t see pump-and-dump schemes in the initial coin offering space,” U.S. Securities and Exchange Commission Chairman Jay Clayton said Thursdayin Washington.