[Korean Exclusive News]
Author: Shin Yi Jin, South Korea
What is “Kimchi Premium”?
According to the Maeil Economy (매일경제) news media,
“Kimchi Premium” is a new phrase that refers to a phenomenon in which Korean exchange market has much higher cryptocurrency prices as compared to international markets, and this is a resulting phenomenon of tremendous local demand for cryptocurrencies but limited supply.
Meaning to say, it is a phrase used to refer to how much more expensive the cryptocurrencies exchanged in Korea are as compared to those in other countries. If the exchange rate is higher, the Koreans say that “the rate comes with a Kimchi Premium” and similarly if the rate is not much higher that it is almost the same as others, the Koreans will say that “the rate doesn’t have a Kimchi Premium”. In short form, the Kimchi Premium is called a “KIMP”.
The term “Kimchi Premium” was only commonly used from 2016 onwards. Before 2016, there was another term called the “Korean Premium” which held a different meaning from the “Kimchi Premium”. The term “Kimchi Premium” was only used after May 2017 when a user of a cryptocurrency information website developed a chrome extension programme to show cryptocurrency exchange rates in Korean. The term quickly spread through Telegram and Kakao Talk cryptocurrency open chats afterwards. On 12 January 2018, Korean Minister of Justice formally used the term during his speech on possibility of dismantling cryptocurrency exchange markets. Now, there are a number of websites where Korean investors can view the difference in rates and the rate of Kimchi Premium on individual coins, such as luka7.net.
What causes the KIMP?
The main cause of Kimchi Premium is high local demand + practically banned arbitrage trading. In a normal market, price difference is easily resolved through arbitrage transactions. This should be even simpler for cryptocurrency markets where all transactions are performed online. However, foreign transactions in Korean cryptocurrency markets are banned at the moment and there are various obstacles for Koreans to make transactions interchangeably in both international and local exchange markets (i.e. difficulty in opening foreign bank account, restriction on the amount per transaction, etc)
Although it is possible for small amount such transactions and there are many investors who have experimented them, the problem lies in the high volatility of the market. Since it takes some time for transactions to be complete, the investors are exposed to risks of suffering a loss if rats were to fall in that span of time (cryptocurrencies are different from stocks in that it is very common for fluctuations of 5~10% daily). Statistically there is a 0.5 probability for change in exchange rates during the span of time of transaction process. Thus, this way of resolving the issue of price difference is not favourable.
The KIMP is a huge problem for the Korean government due to risks of foreigners performing transactions – leaving valueless cryptocurrencies in Korea and bringing cash out of the country. It is a huge hindrance to South Korea’s economic development because the funds and capital that are supposed to be invested in the economy are locked in the cryptocurrency world.
How do you correct the KIMP?
The government can offer a solution to correct the “Kimchi Premium” and that is to ease the restrictions on arbitrage trading. However, there is a very little possibility that the government will carry this out because of the outflow of foreign currency that they are unable to control. For South Korean government which experienced a foreign currency crisis in the past, it is very unlikely that they would risk such a crisis from happening again.
The market can also resolve the issue by controlling the local demand. In April 2018, this way was proven effective in correcting the KIMP. As the depositing process was made complex and registrations for new accounts were restricted, the exsisting demand could not be led to actual transactions. However, the reason for the elimination of KIMP is the drastic decline in coin prices which caused a sharp decrease in demand.