Cryptocurrency exchange giant Coinone—the third largest in the Korean peninsula—will face charges of illegal gambling, according to the South Korean police.
After a 10-month investigation, the cybercrime investigation unit of the South Korean southern provincial police department recommended the prosecution of Coinone’s CEO Chae Myung-hoon and two other officers. The three will face charges of offering illegal online gambling through Coinone’s margin trading services.
Margin trading in Coinone allowed users to bet on future prices of cryptocurrencies. An investor can borrow money from Coinone—with a scheduled day of payment—to buy cryptocurrencies. If the value of the crypto increases, the investor nets a profit. Otherwise, the investor incurs a loss. According to a Korean report, the exchange earned by “allowing the member to pay up to four times the amount of the deposit and to pay a commission in exchange for the transaction.”
While normal stock exchanges offer margin trading, the South Korean police force believes that the unregulated cryptocurrency exchanges are not licensed to offer a similar service. Additionally, crypto exchanges base their market trading on virtual currencies and not on stocks. Because of these factors, according to the authorities, Coinone has violated the country’s laws on gambling.
A Korean newspaper explained:
“The police believe that Coinone is a kind of gambling [business] that provides members with a margin trading service that predicts the market price after a maximum of one week and chooses the number of short sales and makes profit or loss according to the result.”
The police department has recorded a total of 19,000 users who transacted in the exchange’s marginal trading platform. However, only 20 of these users—who accumulated among them more than KRW3 billion worth of profit—will face criminal charges.
Meanwhile, Coinone has denied all allegations of illegal gambling. The crypto exchange has maintained that margin trading is different from gambling, and the service is allowed overseas.
An unnamed Coinone employee, quoted from a South Korean report, said:
“We do not think it is illegal because it has been legally reviewed by lawyers before the margin trading service. Since we did not collect interest on our margin, we cannot see why this trial is happening.”
Launched in 2014, Coinone is South Korea’s third largest cryptocurrency exchange in terms of trading volume behind Bithumb and UPbit. The exchange platform started offering its margin trading services in November 2016 but closed only in December 2017, citing the government’s strict stance regarding margin trading.
A Number of Investigations
Coinone is not the only crypto trading site receiving punches from the government. After the shot to fame of cryptocurrencies—led by Bitcoin—South Korean regulators have started investigations into different crypto exchange platforms.
Korea’s National Tax Service (NTS), Financial Services Commission (FSC), and Korea Financial Intelligence Unit (KFIU) have investigated both UPbit and Bithumb over allegations of illicit activities, tax evasion, and inflated balance sheets. The police—as part of the investigation—raided the headquarters of both exchanges, seizing multiple computers and documents in the process.
The investigation caused an uproar in the South Korean crypto community. The people branded the crackdown on cryptocurrencies as the government’s knee-jerk reaction toward facing a relatively new market.
Lee Dong-gwi, a psychology professor at Yonsei University, explained:
“[If] a growing number of people lose huge sums of money on [Bitcoin] because of the government’s failed attempts to rein in the [crypto] frenzy, people will blame the government. Simply put, the South Korean government could be afraid of the political hassles of being held accountable.”
In the end, the NTS found no conclusive evidence supporting the allegations against both UPbit and Bithumb. As of June this year, the government has cleared both crypto exchange services of any wrongdoing, with Bithumb needing to pay a tax imposed by the NTS.