Law enforcement agencies in South Korea, as part of a major investigation by the Financial Supervisory Service (FSS), are checking cases of illegal bitcoin trading in order to receive the so-called kimchi premium.
The Seoul Central District Prosecutor’s Office has launched an investigation into over 2 trillion Korean won ($1.5 billion) in money transfers from overseas related to bitcoin trading. According to the prosecutor, this money was obtained through an illegal method of bitcoin arbitrage trading through the so-called kimchi premium.
The kimchi premium is the difference between the price of bitcoin on South Korean crypto exchanges and the world (named after a Korean cuisine). Due to the closed nature of the South Korean financial system, market makers do not have the opportunity to arbitrage and equalize the price. As a result, unrestrained growth of quotations on South Korean stock exchanges can be observed. For example, at the beginning of 2018, this figure reached 54%, after which the cryptocurrency market began to collapse.
The law enforcement investigation is part of a larger investigation being conducted by the Financial Supervisory Service (FSS), one of the local regulators. The Financial Stability Board (FSB) has submitted a package of documents to the Supreme Prosecutor’s Office of South Korea, and the data is currently being verified. The documents include a report on the verification of companies involved in money transfers abroad. It is alleged that such legal entities include the country’s leading banks, such as Woori Bank and Shinhan Bank.
According to the FSB, the companies made profits using the bitcoin kimchi premium and then transferred the profits abroad. Much of the remittances went to China.
Against the background of the investigation of Korean regulators and the fall of the crypto market, the size of the kimchi premium has now fallen sharply. Earlier in 2022, it reached 21.5%, now it has dropped to 1.6%.
Since 2017, South Korean authorities have allowed companies to use cryptocurrencies for international payments.
