South Korea’s Central Bank’s Governor Warns that Leveraged Crypto Trading Threatens the Country’s Financial System

It remains to be seen how his warning will affect the crypto market, seeing as South Korea has a growing presence in the sector.

By
Chung Yee
on
May 28, 2021
Category:
Blockchain News

The Bank Warns Investors

The Central Bank’s Governor, Lee Ju-yeol, spoke at a press conference in Seoul after a monetary policy committee’s meeting addressing concerns regarding leveraged crypto trading. The excessive leverage in crypto trading is said to have a negative impact on the country’s financial system. 

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On February 23, 2021 Lee Ju-yeol told a press conference that Bitcoin has ‘no intrinsic value’. The regulators in South Korea have been taking a very tough stand when it comes to regulating its crypto market. Lee Ju-yeol in his most recent statement to the press, highlights the regulator’s concern on crypto leveraged trading. Identifying the price volatility of crypto assets and excessively high leverage trading are factors that are damaging to the country’s financial system.  To quote Lee, from the Korea Herald

“An excessive level of leveraged cryptocurrency trading puts households at risk of financial damages considering the instability of (cryptocurrency).” 

He also gave an assurance that financial institutions involved with leveraged trading will be closely monitored, possibly through a new framework, that will ensure the Korean economy will not be affected by risky activities. 


The Risks in Leveraged Positions

The concerns raised by the Governor are not without merits. Traders often enter into long and short positions using leverage facilities. These facilities depending on the size of the collateral and the leverage set by the trader will determine the liquidation margin. If the trader’s prediction is wrong, the price action by the asset will result in a margin call. The trader has two options, either to increase the collateral and increase the liquidation margin or allow the position to be liquidated. 

Unlike spot market trading, a bad trade does not result in liquidation. The trader can wait for the market to recover and perhaps be profitable. However, leverage traders do not have this luxury. Position will be closed and the collateral will be realised once the liquidation price is reached. Recently the crypto market experienced a massive selldown and leverage traders were blamed for taking excessive risks. $12 billion were liquidated in a week according to Bybit, a crypto leverage trading platform. 

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Massive dips and spikes in the crypto chart are often the result of over leveraged positions. Some exchanges limit leverage trading to only professional traders whilst others do not offer leverage trading facilities. 

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Regulatory Framework or Self Governance?

The concerns raised by Lee Ju-yeol raises a pertinent question regarding the cryptosphere. Should regulators step in to regulate how crypto platforms run their business, particularly the choice of offering leverage trading to their users? This overarching regulatory noose goes against the notion of a free market, as the market has its own mechanism to balance itself. The regulators cannot coddle every individual or institution that wishes to partake in risks that they are aware of, even if those risks could be severely damaging to portfolio wealth. However, to strike a fair balance by giving risk alerts should suffice. Regulators should be more concerned with clandestine activities such as money laundering or scams through crypto platforms. 

Mark Cuban was spot on - risks are not peculiar to the crypto market. It exists in all asset classes, though perhaps more prominently in crypto trading because of the relative age of this asset class. 


South Korea Navigating the Crypto Quagmire

Traditional banks and financial institutions have usually not welcomed crypto, and South Korea is no exception. The likes of Morgan Stanley and JP Morgan have taken positive steps leading towards embracing crypto adoption, as well as Goldman Sachs with their recent declaration of BTC as an asset class. The South Korea’s Central Bank’s Governor is in a precarious position. Having to protect the legacy market and its interests seems like an uphill battle, with a host of new challenges. Financial institutions now face a disruptive technology that is capable of meeting the financial needs of individuals at a fraction of the existing costs with speed and transparency, and must decipher how to integrate these concepts into established finance regulatory framework. 


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Chung Yee

Chung Yee has a legal background and has been involved in research works for the legal and compliance industry. Writing is his passion, centered on topics such as the blockchain and finance.

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