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The recent arrest of Do Kwon, a Korean national and co-founder/CEO of Terraform Labs in Montenegro, has brought Terra Luna back into the spotlight as the United States and South Korea compete for his extradition. Although the Korean crypto community is expected to have a greater interest in the outcome, there are some who actually prefer Kwon to be sent to the U.S. due to the possibility of harsher punishment there.

The impact of the Terra Luna stablecoin project's collapse was felt globally, resulting in the disappearance of approximately $60 billion. However, the most significant aftermath was experienced in Korea, where its effects are still being felt today.

The local media extensively covered the 2022 crash, highlighting the fact that around 200,000 individuals were impacted by the Luna project. SungMo Park, the head of Korea business development at Polygon Labs, commented that even his grandpa was aware of the situation. As a result of the crash, projects that relied on Terra were left without a home, albeit temporarily. Additionally, the presidential administration, which was previously supportive of cryptocurrency, began to show less enthusiasm towards it. As of today, the regulatory environment surrounding cryptocurrency in Korea is still not particularly favorable.

Although Terraform Labs was headquartered in Singapore rather than Korea, the project held significant importance for Kwon's home country. During my recent trip to Seoul, I witnessed the lasting impact of the Luna crash on the community. There were stories of individuals selling their homes to invest in Luna, and rumors circulated that Kwon would have faced danger had he returned to Korea following the crash.

The downfall of a prominent, Korean-born founder clearly had a psychological impact. “Do was a very young Korean leader making a big change in the global scene. There was no software company in Korea that was making that kind of impact on the global level,” said Jiyun Kim, CEO and co-founder of DSRV, which ran a Terra validator in Korea. “He was a kind of north star for Korean crypto founders.”

“Koreans don’t really think Koreans are capable of going global,” said Lloyd Lee, founder and CEO of Hyperithm, a digital asset management firm that is based in both Seoul and Tokyo.

“There were two stars that actually broke that belief. One was [the K-pop boy band] BTS, the second was Do Kwon.”

Going Sideways

When it comes to cryptocurrencies, Korea is considered one of the most influential markets worldwide. According to Coinhills, the Korean won is the second most widely used national currency for trading Bitcoin, trailing only behind the US dollar. In September of last year, Korea's Financial Intelligence Unit (FIU) reported that there were nearly seven million registered cryptocurrency users in the country. As of the first half of 2022, the market size of the digital asset industry in Korea was nearly 23 trillion won, equivalent to approximately $18 billion based on current exchange rates. However, according to a more recent report, the market size dropped to 19 trillion won in the second half of the year.

Local cryptocurrency trading seems to have been negatively affected by the Terra crash, among other factors. According to the FIU's report, the domestic virtual asset market experienced a 58% decrease in market capitalization in the first half of 2022 compared to the second half of 2021. The report cited multiple reasons for this decline, including the economic impact of the Ukraine crisis, increasing interest rates, and decreasing liquidity. The report also noted that the decline in trust in virtual assets due to the Terra-Luna incident played a role in the market's downturn.

Regrettably, the turmoil did not come to an end with Terra Luna. As reported by CoinGecko, FTX.com's collapse had the most severe impact on Korea. Recently, the Korean exchange Gdac suffered a hack that resulted in a loss of almost $13 million. Additionally, in December, prominent crypto exchanges removed the contentious token Wemix from their platforms, causing a decline in market capitalization of nearly $300 million. These events are unlikely to instill confidence in regulators and businesses who had already harbored concerns about the safety of cryptocurrencies.

The political implications of the Terra Luna crash, along with other factors, were evident in last year's presidential election, as candidates adopted positions favorable to cryptocurrencies in a bid to appeal to young voters. The eventual winner, President Yoon Suk-Yeol, made promises to limit taxes on crypto profits and permit initial coin offerings. This resulted in a wave of media coverage suggesting a crypto-friendly administration, leading to a surge in the price of at least one Korean crypto project as investors grew optimistic about the future of the industry under the new government.

In May 2022, the same month Terra collapsed, Yoon took over the presidency.

“The new government can’t just go pro-crypto when all this Terra Luna happened and people are losing their assets or money, and companies are going bankrupt…and all these social problems are happening at the same time,” Hyperithm’s Lee said. “They can’t just say, we’re going to keep our pro-crypto stance. So they backed away a bit.”

Hedging risk

At the beginning of this year, Korean media covered the progress of the Digital Asset Basic Act (DABA), a set of 17 draft bills primarily aimed at safeguarding the interests of investors. However, none of these bills have been approved to date. “We were on the way to make some new crypto legislation, especially after the new presidential administration started. But so far there has been almost no new regulation, only discussions in Parliament,” said Jongbaek Park, a partner at Bae, Kim and Lee.

Currently, the primary objective of cryptocurrency regulation is centered around the prevention of money laundering and terrorism financing. In 2020, the AML act in Korea was revised to incorporate virtual-asset service providers (VASPs) within its scope. As a result, Korean crypto exchanges are required to report to the Financial Intelligence Unit (FIU) and adhere to know-your-customer (KYC) procedures for new clients, in addition to reporting any suspicious transactions.

At present, there are only five cryptocurrency exchanges that facilitate trades with the Korean won. The government's efforts to tighten anti-money laundering (AML) regulations have led to restrictions on the number of virtual-asset service providers (VASPs). To this end, a new guideline was introduced stipulating that any virtual-asset service involving Korean won must be linked to a specially designated bank account. As explained by Park, this move is intended to strengthen AML measures in the cryptocurrency sector.

“The Korean government tends to place too much importance on the prevention of risks, like investment protection, protection of market stability, rather than to encourage possible innovative effects to the market or community,” Park said.

“AML regulation is good to get rid of bad actors, such as those doing money laundering or terror financing,” Park added. “The problem is the government has not legislated other regulation.”

According to CoinDesk Korea, the apprehension of Do Kwon has brought the focus back onto the regulation of crypto assets, giving impetus to a long-pending process. As a result, a crypto-related bill is likely to be put to vote this month, while another could be under consideration in the following month. These bills aim to safeguard user deposits, prevent the use of undisclosed information, curb market price manipulation, and deter illicit transactions.

"Last year, the Tera-Luna scandal was still unresolved, followed by the FTX scandal. The pace of change in the digital-asset market is very fast, so related bills should be carefully enacted according to the situation," Yoon Chang-hyun, a member of the National Assembly, told CoinDesk Korea in late March.

"The bill on digital-asset trading (currently pending in the National Assembly) is expected to be passed within the second quarter of this year," Yoon said. The first step is to enact a transaction law, and the second step is to enact a basic law."

There was one sign of progress in February, when Korea issued guidance on security token offerings, or STOs. “The Korean government didn’t want to permit token-type securities in general, even though they had designated regulatory sandboxes for four STO projects. These guidelines are a big change,” Park explained. But a more careful look at the guidelines shows they are not as progressive as they first look.

“The fact that the FSC announced STO guidelines is good news for crypto. But if you go into the details of that guideline, they have a restrictive attitude toward the extent of STOs. For instance, they essentially exclude public blockchains,” Park said.

Moving on

Traumatic events can have a significant impact on a country's cryptocurrency trajectory, often shaping it, at least temporarily. For example, in Japan, the Mt. Gox and Coincheck exchange hacks caused regulators to become wary, leading to a several-year period of caution within the domestic crypto community. However, these events also inspired Japan to develop some of the most transparent and comprehensive crypto regulations worldwide.

On the other hand, the United States is still dealing with the aftermath of FTX's collapse, which dealt a very visible blow to an industry that already faced plenty of detractors in Washington. Due in part to recent crackdowns by the SEC, some crypto businesses are now avoiding the United States altogether.

Although Kwon's arrest brings the Terra Luna crash story closer to closure, the dust has not completely settled in Korea. According to multiple sources, traditional Korean companies have become more cautious about being linked to cryptocurrency after the crash. “Before Terra, all the big companies were joining the momentum. Investment banks actually invited us to give them seminars on crypto ETFs or how they can pave their way into the crypto market. But I guess now the attention has become a bit selective,” Hyperithm’s Lee says. “Not all the companies are interested in crypto anymore.”

Although it remains uncertain what regulatory stance Korea will ultimately adopt towards cryptocurrencies, its retail market continues to demonstrate significant influence. One example of this is the recent surge in trading volume of the XRP token, which reached billions of dollars on leading local exchanges such as UpBit, Bithumb, and Korbit.

“Whenever the next bull market comes, retail traders will be back. I had friends asking me at $60,000-bitcoin if they should sell their house to buy bitcoin. This all or nothing mentality is not uncommon in Korea,” said Anthony Yoon, managing partner at ROK Capital.

Some previous members of the Terra community found other chains. And in the crypto industry, optimism remains strong. “Right now the wave is gaming companies,” said SungMo Park. “And I think the next wave will be entertainment. We are good at gaming and entertainment, and we have all the conditions to succeed.”

To put it differently, significant segments of the Korean market have already moved on from Terra Luna's downfall. It remains uncertain if there will be any crypto-friendly regulations in the near future or at all. However, Korean developers and traders are not fixating on the past.

“People tend to move on quickly to the next hype or the next incident, in order to keep up with the fast-moving Korean trends,” said Erica Kang, founder and CEO of KryptoSeoul, a community-building team in Korea.

“When a huge, devastating crash happens people are shocked of course and are negatively affected, and they harshly criticize. But then, maybe weeks later, they are back in the game.”

Source Coindesk