South Korea and Japan, the third and fourth largest Bitcoin exchange markets, are no longer showing Bitcoin price premiums.
On May 25, Cointelegraph reported that Bitcoin price surpassed $4,500 in South Korea as the market’s premium reached an extreme. Bitcoin was traded within the South Korean Bitcoin exchange market for as much as five mln Korean won, the highest bid in the global Bitcoin exchange market’s history.
At the time, the global average Bitcoin price barely reached $2,600 prior to a major market correction which ultimately led to a $700 decline. However, as analysts including Max Keiser noted, Bitcoin price always recovers beyond its initial peak and at the time of reporting, Bitcoin price is stable at around $2,900.
Strict anti-money laundering (AML) policies and capital controls
When evaluating premiums in markets such as Japan and South Korea, it is important to consider the strict anti-money laundering (AML) policies and capital controls both countries have implemented in the past. Japan, in particular, significantly strengthened its AML policies as the Act on Prevention of Transfer of Criminal Proceeds came into effect on October 1, 2016.
Global law firm Hogan Lovells, which houses over 2,500 lawyers, explained the changes made by the Act on Prevention of Transfer of Criminal Proceeds in its report:
“The 2016 Amendments are particularly relevant for banks and other financial institutions operating in Japan as it sets out revisions in relation to how certain institutions should determine suspicious transactions, verify contracts with foreign correspondent banks and implement additional in-house AML measures.”
Similar AML policies and capital controls currently implemented in South Korea made it difficult for traders and investors in both countries to take advantage of arbitrage opportunities. Hence, even when there was a 30 percent premium in South Korean and Japanese Bitcoin exchange markets, traders found it extremely difficult to profit from the premium rates. Even if they found a way to do it, large amounts of transfers would be immediately flagged by strict AML systems.
Factors behind the extreme premium rates
South Korea and Japan’s extreme premium rates did not dematerialize overnight. It began with the stabilization of the Chinese market and the resumption of withdrawals led by the big three Bitcoin exchanges in China - Huobi, OKCoin and BTCC.
As the global market stabilized and the Chinese Bitcoin exchange market recovered, premiums started to decrease. Chinese exchanges, which used to process Bitcoin trades around 25 percent lower than the global average price, began to process trades at a value higher than the global average Bitcoin price.
During that time, liquidity in the Japanese and South Korean markets also increased drastically. Some of the largest companies in Japan, including the multi-billion dollar internet conglomerate GMO, opened a Bitcoin exchange to address the rapidly increasing demand for Bitcoin and South Korean exchanges also began to focus on providing higher liquidity toward traders.
Ultimately, the recovery of the Chinese market acted as a catalyst for global Bitcoin exchange market stabilization and standardization.