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In a sudden reversal of policy, the South Korean government announced on Thursday that a bill is afoot banning anonymous cryptocurrency trading, sending a ripple effect across the digital currency market as police and tax authorities raided exchanges on suspicion of tax evasion. 

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In reality, the Korean exchanges would still allow trading, but install procedures that are already in place on larger hubs like Bittrex and Bitfinex. Presenting a passport and a proof of identity are tools to avoid money laundering and are a staple in exchanges in the US and Europe. More often, ICOs are employing the strategy to increase accountability.

South Korea‘s Justice Minister Park Sang-ki told reporters at a press conference at his office in Seoul that the proposed ban on cryptocurrency trading was reached after intense consultations with concerned government agencies, including market regulators and the finance ministry.

"There are great concerns regarding virtual currencies, and justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges,” said Park.

The clampdown on virtual currencies in South Korea comes as the police raided Coinone and Bithumb, two of the largest cryptocurrency exchanges in South Korea on suspicion of tax evasion. The finance ministry also said earlier it was looking for ways to tax the cryptocurrency space that has grown exponentially as big as Seoul’s small-cap Kosdaq index in terms of daily trading volume.

On Wednesday, the nation’s financial regulators have inspected banks that allow corporate customers to open virtual accounts on concerns such accounts could be used to circumvent a law banning them from attracting new investors for cryptocurrencies.

Banks are prohibited from offering virtual accounts in South Korea because they are used to buy or sell cryptocurrencies to individual customers. The ban is implemented to prevent speculative investment in virtual coins.

South Korean Ban Sends Shockwaves

News of a pending ban of cryptocurrency trading in South Korea swiftly drew shockwaves across the market, with Bitcoin sliding as much as 14 percent and tumbling down below $13,000 immediately after Park’s announcement.

But the cryptocurrency quickly recovered and traded at $13,647.90 at 1:30 pm UTC, data from CoinMarketCap showed.  But the decline in value still hit Bitcoin as digital currency's market cap fell from $245 billion to $229 billion in one day.

Also reporting losses from the announcement were Ethereum, which fell 12% to trade at and Ripple, which lost 14% to trade at $1.71 per coin. Other popular cryptocurrencies, like Litecoin and NEM, lost over 5% and 10% respectively.

Surprise Move

The move by South Korea’s justice minister comes as a big surprise after the nation’s Financial Services Commission (FSC) Chairman Choi Jong-ku’s revelation just two days prior that vice ministers from China, Japan, and South Korea met in Seoul in December to exchange ideas on crafting cryptocurrency regulation.

Choi said Seoul wants to "set up a detailed system of cooperation" with China and Japan. The official also warned the public against "irrational" trend of investing in cryptocurrencies, and added that a "fever of speculative investment in cryptocurrencies is ongoing."