With an investment fever about virtual currencies such as bit coins showing no sign of cooling off, it is pointed out that virtual currency exchanges are rather encouraging speculation. This is because virtual currency exchanges allow investors to short-buy or short-sell foreign currencies up to four times their collateral value with their virtual currencies as collaterals.
According to the financial industry, CoinOne, a virtual currency exchange, operates a system that empowers investors to short-buy or short-sell foreign currencies up to four times their collateral value with their virtual currencies as collateral. If an investor has bit coins worth 10 million won (US$9,000), the investor can buy or sell up to 40 million won (US$36,000) with his or her bit coins as collateral. Bithumb, the nation’s largest virtual currency exchange, also operates a system that allows users to place buying orders if users give one third of payments for virtual currencies as collateral.
Users can buy bit coins with a small amount of money or sell them in anticipation of a drop in prices without bit coins. But prices of bit coins are highly subject to change so the risk of loss is also high. For example, the price of a bit coin soared 117 percent from 2,152,000 won (US$1,936) on May 24 to 4,681,000 won (US$4,212) on the following day, but dropped 40 percent to 2.88 million won (US$2,590) two days later.
If you buy bit coins worth 10 million won and buy 40 million won (US$36,000) worth of bit coins and the price drops 25%, you will lose a principal of 10 million won (US$9,000). Then you began to sell and lose all the bit coins that you bought as collateral. On the other hand, if you buy 10 million won (US$9,000) worth of bit coin and sell 40 million won (US$ 36,000) worth of bit coins and the price jumps 25%, you will lose your principal and you will begin to buy them. Given transaction commissions for trade, your losses will exceed your investment principal.
In the stock market, there is a circuit breaker system that pauses stock trading when stock prices fluctuate. But there is no device that can protect investors in virtual currencies such as bit coins devoid of regulations. An official of the financial industry criticized the virtual currency market, saying, “Virtual currency exchanges are attracting investors with mortgage loans on security and short selling and buying like a stock market, but there is no legal regulation. So, virtual currency exchanges are operating like gambling joints.” Although the Financial Supervisory Service (FSS) issued matters that people have to be attentive to in virtual currency investment last month, pointing out the risk of fluctuations in value, the FSS is doing nothing as the organization has no authority to regulate virtual currency exchanges.
In the meantime, with rising voices for a need for an investor protection device at a time when virtual currency investment increases, Park Yong-jin, a lawmaker of the ruling Minjoo Party is planning to propose an amendment to the Electronic Financial Transaction Act which introduces a virtual currency exchange authorization system this month. In November of last year, financial authorities launched a virtual currency task force (TF) team with the participation of the Bank of Korea and the Ministry of Strategy and Finance and continue to discuss virtual currencies by bringing in officials from other government ministries and offices.