Earlier this year, Oleg Smagin published a Digital Assets 2022 Outlook: South Korea. Summary of 2021 and Predictions for 2022. Alex Jensen spoke to on the key issues surrounding digital asset.
Together they go through some major points of content with regard to digital assets.
- The Korean market, with 5.8 million unique traders in Korea, how does Korea rate as an earlier adopter?
- What are the key concerns about regulation? Too much, not enough, or the wrong sort?
- What is the kimchi premium? Why does it exist?
- Is the hype behind NFTs subsiding? Is there really some value there?
- How will the NFT gaming market (or play-to-earn) affect the ‘normal’ gaming item shops?
- Is NFT merchandise produced by companies like HYBE (BTS’s) management company putting teenagers at risk? Will teenagers even buy an NFT, or will they want the physical item?
A successful niche player in the cutthroat world of delivery apps
Alex Jenson 00:08
You’re listening to Korea biz cast with the KBLA. I’m your host Alex Jensen, and it’s Wednesday February 16. 5.8 million people in Korea traded a cryptocurrency at least once in 2021. That’s over 10% of the population. And dozens of local crypto exchanges and custodial companies applied to operate in this space this year. But there’s much more to say based on a recent report titled digital assets 2022 outlook, South Korea, its author will be joining us shortly. And if you want to take part in our show, or ask us anything, find us on LinkedIn by searching KBLA and send us a message or email firstname.lastname@example.org. So we can now welcome Oleg Smagin, the twin brother of our recent guests, Genya. And since we last spoke to you all like you’ve moved to become blockchain business Senior Manager at Cocone Seoul. It’s been three months or so, hasn’t it? And if so, can you tell us a bit more about your new role?
Oleg Smagin 01:17
Hi, Alex, it’s good to talk to you again after my brother. I really enjoyed his conversation last week. Yeah, I have an update, I moved to a company called Cocone. I’ll be doing basically the same thing, creating new blockchain services. And yeah, we are doing a little bit of DeFi. We are currently developing our own blockchain, we will have an ecosystem of different crypto services that includes gaming that includes decentralized exchange, and a few more features as well that are coming soon.
Alex Jenson 02:00
If anyone’s not sure what defi is, we did mention it when we spoke to Oleg a few months ago, but we will come back to that in a moment. First, let’s talk about that big number I gave earlier, which is 5.8 million unique traders of cryptocurrency in Korea last year, that percentage of the population seems pretty vast is that where does that actually stand up in terms of the global population?
Oleg Smagin 02:24
Oh, well, I just want to say that we can look at these really big number from different perspectives. First, if we compare it to the number of domestic stock traders, it’s still almost twice smaller. There are more Koreans who trade stocks than those who trade crypto. However, if we compare this number to other countries, we can say it’s a high level of penetration, but yet not the highest. In terms of the adoption level, developed countries, including Korea, are not among the leaders in the last year’s crypto adoption ranking published by Chainalysis. Five developing countries Vietnam, India, Pakistan, Ukraine and Kenya. We are highlighting this crypto adoption leaders. The reason for that is that users from many developing countries use crypto not just as an investment tool, but as a tool to store value because in many cases, crypto, very water crypto is less volatile than this country currency. And second, because these people use it as a tool to save money on remittance. Imagine you can send stable coins from your wallet to the wallet of your relatives in your country in seconds for almost no fee. If you do that by carrying cash to a bank, they will charge you so much, much extra and it will take more time. Now we also have countries like El Salvador, where Bitcoin now is a legal tender, and where a local Starbucks should process payments in Bitcoin, even if the Starbucks doesn’t want to. And if we go back to Korea, we are yes, we are very far from seeing some crypto use cases from developing countries going mainstream here. But if we exclude those developing countries like El Salvador and only compare Korea to other developed markets, the share of the population trading crypto, about 11% is indeed one of the largest. Let’s say in the US. This shape is estimated to be around 8%. It’s about 4% in the UK and about 3% in Germany.
Alex Jenson 04:44
A couple of questions actually come to mind before we continue with my plan to discussion on crypto in Korea. One is our cryptocurrency is not too volatile to be considered legal tender anywhere, even if it would be a developing country.
Oleg Smagin 05:01
Well, that’s true. And this is definitely not something that would be suitable to a large economy, because it’s a high risk. And El Salvador now is the only country where bitcoin is legal tender, when Salvador introduced it as a legal tender, they will protest there because local businesses they didn’t want to many of them didn’t want to accept Bitcoin for payments. But the logic for it was that now Bitcoin well is growing. So everyone who uses Bitcoin for payments now, if you accept payments now, then later your Bitcoin gonna grow in value, and eventually, money you take today, gonna be more money tomorrow, gonna be more money next month, so everyone will profit from that. That’s a very controversial, a lot of people disagree. But well, as I said, El Salvador is an experiment. And in fact, for us, people who are outside, it’s interesting to see what’s gonna happen. But as I said, a lot of people aren’t happy about that. And that’s true. That’s for countries like Korea, it’s not the case.
Alex Jenson 06:20
The other thing that came to mind when you’re speaking before was the reference to chainalysis. Because I saw them recently cited in regard to North Korea’s theft of cryptocurrency. In fact, enough to fund at least part of its weapon program, a lot of money, we’re talking about hundreds of millions of dollars worth of cryptocurrencies in 2021 alone. Now, I’m not asking you necessarily to go into the ins and outs of North Korea and security questions, but doesn’t sound particularly appealing to be involved in an area that is vulnerable to theft, at that scale, by a country that’s potentially able to use it for means that would be counter to global desire. And you could extend that perhaps to other bad actors in inverted commas. What are your thoughts on that?
Oleg Smagin 07:13
Well, that’s a very good point. Because if we, if we are talking about decentralized protocols where there are no KYC, you don’t know, there is no no your customer fee. There is no registration, you don’t know who is the person who is training the cryptocurrency on your platform, there is there is no way to find out who are the people who take loans from this platform, it could be Kim Jong Un, on the other side of the wallet, and then on the other side of the of the decentralized protocol. And, and in this case, of course, the regulators are very concerned that these protocols going to be used for illicit activities. But at the same time, we have a lot of advantages here. You know, these protocols that enable people to use them for illicit activities also enable people in in many developing countries to use to actually use financial services without being able to go to a bank. And this is a great value for many poor people in developing countries. But also, I want to say that when when we talk about hacking, in many cases, it’s the problem of not just decentralized protocols, a lot of financial, centralized financial services also get hacked. A lot of banks bank infrastructure also gets hacked. And just the problem of, you know, flows of the golden. So North Korean intelligence can do the same, probably almost the same probability of success, trying to hack infrastructure of some, you know, some middle tier bank somewhere in a developing country, and they will probably succeed as well. I just think that they all the hype that is now surrounding crypto attracts a lot of people to crypto in particular, to try to hack to try to, you know, use the flows, the arrows of the protocols to extract some money from it.
Alex Jenson 09:48
Very interesting, and I thank you for indulging that tangent or like, because I know you weren’t prepared to talk about North Korea today. The next area that I wanted to focus on was legislation. This is particularly relevant to us here in South Korea, maybe, too relevant the amount of legislation. Can you go through it with us? And for example, the way it affects foreigners who want to invest in cryptocurrency here in Korea?
Oleg Smagin 10:13
Well, good question because 2021 was, in my opinion, a year of regulators, because we have seen a lot of regulatory action, probably more than ever, both in the US globally and in Korea in particular. In fact, Gary Gensler, the chairman of the Security Exchange Commission in the US, even sets that before 2021, the crypto market was wild west, and it’s time for the regulators to step in. In Korean, the biggest change we have seen this year last year to 2021 was the introduction of a licensing system for crypto service providers. Before that, there was no special framework which would set particular standards for companies which want to provide crypto services. Now, if you want to provide services regarding exchange, custody or wallet service, you have to undergo screening from the regulator and get the license. Furthermore, to get a license, crypto service providers now have to comply with the KYC and AML rules to fight the illicit activities we just talked about in the case of North Korea. So foreign traders, became the first victims of this new rules. Unfortunately, none of the biggest service providers in Korea now allow them to reduce the trade and withdraw assets anymore, which is the unfortunate result of the tightening AML and KYC policies.
Alex Jenson 11:59
What’s your view on how well people are protected with this year of regulation? Now behind us? Is it too much or not enough or misplaced? For example, in the case of targeting foreigners?
Oleg Smagin 12:11
Well, there are many opinions in this regard. But the consensus is that the most important thing is to keep the balance, because too few regulations may be dangerous, because they leave investors, retail investors without protection, and businesses without clear guidelines. But at the same time, too much regulations mean you put the entry barriers too high, and it can just kill innovation and cause over concentration of the market. With digital asset industry here, I think the question is rather about the character of the regulations, not about the amount of them. So the current regulations in Korea unfortunately, yet do not have a mechanism for protecting investors. Moreover, they don’t even clearly define different categories of digital assets and don’t set rules for issuing them. The current I would say the current rules are more about trying to limit the funds from leaving Korea and creating favorable conditions for taxation. They are not about protecting investors yet.
Alex Jenson 13:27
We also hear here in Korea about the Kimchi premium and it’s got nothing to do with the price of kimchi during the old Kim Jang season or any other weather related events. It’s all about the apparent premium that you have to pay when dealing with cryptocurrencies, here in this country. Is it a myth? Is it something that fluctuates and what’s its status today?
Oleg Smagin 13:52
Well, it’s needed an interesting name. I don’t think all foreigners who hear that associate that with Korea because I don’t think everyone knows Kimchi. And I don’t know where it comes from. But in short, Kimchi premium is the premium Korean investors pay for digital assets like Bitcoin, when they buy it on the Korean exchanges, insured Bitcoin and Korean exchanges it is more expensive than Bitcoin in other countries. Kimchi premium is a result of multiple factors. The biggest one our strict capital flow rules, and then the result the isolation of the Korean market from the global one. There will be no cream Kimchi premium foreign users could freely trade and withdraw money on the Korean exchanges. Or let’s say Korean users could buy bitcoin on by Nonce or other global exchange with their credit cards. None of these two things now are possible and the result is simple. Can users have to pay for being isolated by paying more for Bitcoin. So Kimchi premium usually goes up to 10 15% during the bull market. But now well usually stays at around 2- 5%.
Alex Jenson 15:19
Not particularly appealing, then it’s not the sort of tag you want associated with your country necessarily. Maybe the regulators will feel it’s a sign they’re doing their job.
Oleg Smagin 15:28
Yeah, Alex, I just I just think it’s a general rule in a market economy. If you stay isolated, you pay you pay more, any tariffs, any, any no barriers make the product more expensive for end users. And this is not I mean, the crypto market is not an exclusion. If you keep barriers to high people, the users gonna pay twice.
Alex Jenson 15:54
Are you not coming up against a huge barrier with your work in a defi decentralized finance? And how do you go about that in the face of Korean regulators?
Oleg Smagin 16:06
Well, I feel defi is actually one thing that is yet to be regulated. But the international body FATF has issued the guideline that defines the framework for defi regulation. And most probably will see first regulations come in for fortify this year, that the problem with regulating defi is that these decentralized protocols, there is always a developer behind them. But in most cases, they are left for community. So there is always usually a mechanism for a developer to generate some fees from them. But the governance on the protocol with the protocol is given to users. So for the regulator’s, it’s really hard to find the party whom they tell, you know, who can be in the end responsible for, for any illicit activities that can happen there. I would say that, probably more than regulators, the parties that are concerned about the defi the most infects financial institutions and banks, not only Korean financial institutions, but banks all across the world are concerned because in many cases, they have to compete against it. And they couldn’t dress the growth of defi was reasonably possible thanks to the advantages it has against the centralized counterparts. First, defi is efficient, because it removes these intermediaries. And seconds, the biggest advantage is that it’s it’s, it’s less costly. In traditional finance, the intermediaries are taking fees that are much higher than the ones you can pay on defi apps. Let’s say if you borrow from the bank, one part of it goes to the lender. And one part of it, it goes to the lender and one is taken by the bank as a commission right? In defy, there is no bank. So lenders can enjoy higher yields, while borrowers can borrow with lower fees, that’s the logic of defi, and not just regulators who want to, you know, limit the illicit activities, but institutions are very concerned as well. Because in their case, they are competing against it.
Alex Jenson 18:48
Another term we hear a lot and people who are just kind of skirting on this issue may be very curious to hear your thoughts on NFTs. And it’s been a recurring theme actually on this podcast. And I sense we’ve only just begun. Perhaps we can set up this part of the conversation with your analysis on on where we’re at right now. Like do you think we’ve just scratched the surface? Or do you take the view of some skeptics at this point? Are you starting to feel pessimistic about the future of NFT’s when when you get so much hype around people selling selfies for so much money? It kind of looks a bit ridiculous. What’s your view?
Oleg Smagin 19:29
No. Well, I I’m very excited about the NFT market and I think it’s going in the right direction. It will create a lot of utility for users and you know, add more value to some of the industries which we are far from crypto. I think the NFT was probably the biggest crypto trend last year, the sales reached 25 billion Just last year, one year ago, it was less than 100 million. So it’s an enormous growth. And in Korea as well, if we look at the statistics of the biggest NFT trading platform open see, we can see that Koreans accounted for 5% of their visitors so Koreans have a lot of interest about trading NF T’s. And more importantly, as I said, NFTs are the game changers that helped to create totally new use cases in the industries that were far from crypto. Probably the biggest one here is played to earn games or so called Game fi. Simply put, play during games, video games where the player can receive rewards with real world value. Unlike the regular game CEO Alex probably play regular games. So you know well. In regular games in game items are held and owned by the companies that created this game. And but NFTs enable users to own these unique assets that they purchase in the purchasing game. Once you own this NFT you can freely sell it outside of the platform where it was created. Something that’s not really possible with any regular game. I know. We have regular games, there is no incentive to play other than poor enjoyment. So if you like the game you play if you don’t like the game, we don’t play. By contrast, Blockchain gaming offers players the opportunity to earn real money. So there is the game called XC infinity, probably you’ve heard of it the biggest play term game so far, they have generated so much wealth for active users that in countries like the Philippines or Indonesia, people are even playing EXIT to support their families. So they they play it for money. The mainstream gaming industry has also been enticed by the prospect of NFTs and play to earn. So even companies like Ubisoft have announced plans for NFT gaming. And you know, I think just looking at the NFT gaming and the dynamics on the of the industry, I think NFT this year will find another big use cases and other industries. Mostly it will introduce services that use NFTs as a core element of the economy. So I’m very excited about it.
Alex Jenson 23:00
You know, I don’t want to put a dampener on because there are obviously a lot of exciting areas that you’ve addressed there. But couple of concerns come to mind. And I think particularly as a parent, parent of kids who love gaming, I’ve got enough concerns about them, wiling away the hours on the games. If you add money to the equation, like the opportunity to earn, it suddenly starts to become perhaps an even bigger worry that kids would be drawn to it for that reason, on top of the sense of reward that they may get from winning whatever game they’re trying to play. And then on top of that, you’ve got companies like HYBE, the company behind BTS pushing Kpop merchandise, which is obviously targeted at teenagers in many cases. How do we address those types of concerns? Do you think?
Oleg Smagin 23:51
Well, I won’t overestimate the this kind of issues because it’s for teenagers buying BTS merchandise. I believe that BTS NFTs are not much different from BTS physical merchandise that users can buy both offline and online. In fact, it can be even harder to get NFTs even harder to get is buying such NFTs requires going first exchange then registering them, buying crypto and then buying NFTs and you know 18 under teenagers are only able to do it for the accounts of their parents. And also one thing I think one misbelieving about NFTs is that NFTs is something that you know everyone wants to buy and any NFT created can be easily sold. This is not true. And even for BTS. Selling NF Ts would not be as easy as it seems. It remains to be a question whether Kpop merchandise, even BTS merchandise made in NFT will be as popular as physical one. So just you know announcing that the famous group is going to issue NFTs and sell them doesn’t mean that the teenagers gonna buy it with more with with, you know faster speed and more expensive price. Then they buy T shirts or postcards with BTS member faces.
Alex Jenson 25:37
I mean, I guess perhaps this just drives at my own lack of grasping NFTs at this point. But I’m concerned that somehow kids are either deceiving themselves or they’re being deceived into wanting something which they might later feel duped by is something that’s virtual, something that they can’t even touch. But this also just drives it the future of Metaverse and viewing digital twins in a completely different way, and so on. And it might be a discussion that we have to continue going forward. But there is another part of it that I wanted to ask you because it reminds me of the conversation we had earlier about cryptocurrencies, do you view primarily these tools as investment opportunities, or as products in themselves?
Oleg Smagin 26:31
Well, I think it’s a great question. And here I’d like to start with saying that NFTs are also different. There are NFTs that are sold as collectibles, as digital art items where you basically buy just a picture, which doesn’t have much utility by itself. I mean, you can create it to a tee by taking it and you know, showing it in your private gallery. You can think about different use cases. But there are other types of NFTs which have for more utility in the sense that they can be used in a particular platform from the beginning. Let’s say that the NFTs we just talked about the game and NFTs where you let’s say, by if you play games, where you buy armor away, why the different items to decorate your space, then these NFTs can be just sold directly to users who use them in a game and you know, it’s a different kind of utility. So it’s only sense for in the first case, we just talked about the digital art items. Of course, there is a lot of speculation here and a huge trading volume that was generated last year is partly because the speculation rolls a lot and a lot of people fault. If I buy a monkey, a digital art item. I can sell it I can just sell it for more expensive price one week later. I won’t use it anyhow, I’ll just resell it. But you know this kind of hype is decreasing now and we see a growth of a very, very healthy growth of the NFTs the tabby tivity gaming NFTs you know different kinds of NFTs that represent some unique value in a particular platform or platforms and this kind of NFTs are not very different from items for which you pay money in now, and which are not issued as NFT as I said you can buy are more in a game now, which is not issued as NFT later it can be issued as NFT and you will pay the same money but it will be yours. So in fact NFT in this case generates more value for user for the same money. So I believe as you said, there is a lot of speculation and it will be in the market for a while. But in the end in the end I think we will get to a much healthier market where people are going to see whether were the NFTs a bi really have any other that well you then then just you know investment. Speak of speculative value and to the market where people people can verify whether these NFTs are really created by by the offer, who is selling them first and whether they are really unique. So I think I think we are getting there and we will get there sooner or later.
Alex Jenson 30:24
Oh, like thank you so much for your overall assessment as well as for your report digital assets 2022 outlook for South Korea. It’s been an absolute pleasure connecting with you once again, we’ll have to make it a quarterly thing at least. Good luck. In the meantime with your role your new role at Cocone soul.
Oleg Smagin 30:44
Thank you Alex. It was a great pleasure to talk to you again and I’m ready, always ready to join you again. Sooner or later these next month.
Alex Jenson 30:52
I’ve said it before we got to get you and your twin brother on together at the same time, not a few days apart like we did before as well. But thank you again so much. If anyone wants to check out that report by the way, email us email@example.com and we’ll help you out there you can also find us on LinkedIn by searching KB la just send us a message or follow for updates in the future as well whatever you prefer so great way to keep in touch with Korrsbizcast development. And thanks again for your company today. We’ll be back again tomorrow.