The Cyber Criminal Investigation Unit of the Southern Provincial police department of South Korea has declared that a margin trading service offered on the Coinone exchange from November 2016 to December 2017 is equivalent to illegal gambling. Three Coinone executives and 20 high-volume margin traders will be arrested and prosecuted.
Coinone is the third largest cryptocurrency exchange in South Korea behind Upbeat and Bitsum, and currently handles tens of millions of US dollars per day of cryptocurrency trading. This is the first time police have investigated Coinone; the investigation process started in August 2017. It took them considerable time to study the law regarding this case.
Margin trading is when traders use borrowed funds from the exchange to leverage their trades of a cryptocurrency. On Coinone traders could leverage up to four times their actual deposit, and would win or lose money depending on if the cryptocurrency price went up or down during the week after the initiation of their margin trade.
This provided a method for Coinone traders to short sell, which is a technique where they would profit if the cryptocurrency market went down. In a short sell, a trader sells the cryptocurrency that they bought with their leverage, and buys it back at a later time to repay their margin trading loan, resulting in a profit.
Margin trading and short selling are authorized on the regular stock market in South Korea, but it is not an authorized technique for cryptocurrency trading according to South Korean law. Police determined that Coinone’s margin trading violated gambling laws. When it comes down to it margin trading, traders are betting on short-term price changes.
In total, 19,000 margin trades were conducted on Coinone, but only the top 20 margin traders who handled over KRW 3 billion (USD 2.8 million) will be prosecuted. These traders claim innocence since they thought it was legal due to a similar service being offered on the stock market.
Police say that margin trading on Coinone was possibly used to launder money from criminal activities, although they didn’t back this statement with any specific evidence.
Coinone has said it is fully cooperating with the ongoing investigation.
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