South Korean prosecutors seeking to crack down on traders exploiting arbitrage between domestic and foreign crypto prices, known as the “kimchi premium,” have suffered a major setback. Of 16 people accused of illegally remitting $3.2 billion worth of crypto and fiat currency, 14 were cleared of wrongdoing by a Seoul court.
Prosecutors had accused the defendants of running a sophisticated operation that exploited the kimchi premium – the phenomenon where cryptos like Bitcoin trade higher in South Korea compared to foreign exchanges. While two people received minor sentences, 14 were acquitted, including an individual suspected of masterminding the trading scheme that netted an estimated $6.5 billion.
The Seoul Central District Court rejected the prosecution’s argument that the trading violated the law. According to the court ruling, the case relied too heavily on Supreme Court precedents rather than codified statutes. Prosecutors plan to appeal the decision to the High Court, hoping for a more favorable outcome.
The kimchi premium refers to the tendency for Bitcoin and altcoins to trade at significantly inflated prices on South Korean exchanges compared to foreign platforms. This discrepancy arises from periods of intense retail investing demand domestically. Traders can exploit the premium by purchasing crypto cheaply from overseas vendors before offloading it at a profit locally – a form of geographic arbitrage.
While ethically questionable, there is debate within South Korea’s legal community about whether such trading actually breaks the law. Prosecutors in this case accused the defendants of disguising $3.2 billion worth of premium trades between April 2021 and August 2022 using shell companies and fabricated transactions.
However, the court found insufficient evidence to demonstrate illegality definitively. The judge also ruled that previous Supreme Court rulings were too narrowly focused on individuals’ misconduct rather than addressing the complex issues around kimchi premium trades directly.
The case now likely heads to the High Court, where prosecutors are confident they can make a stronger legal argument against the practice with newly passed crypto regulations. As of July 2023, Korean crypto traders face increased scrutiny and penalties for market manipulation. But for now, the dismissed defendants have avoided punishment for exploiting the longstanding kimchi premium phenomenon.
