Explaining Fishing Net Pumping in Korean Crypto Trading
A threat to South Korea's crypto market stability
TL;DR
The South Korean cryptocurrency market is considered a mature market receiving global attention, but its health & stability is threatened by price manipulation issues such as "Fishing Net Pumping (FNP)".
Fishing Net pumping is characterized by the following steps :
A temporary suspension of deposits and withdrawals of a particular cryptocurrency on an exchange
Speculative capital and forces intentionally drive up the price
Following demand from retail investors drive the price rises.
However, there are currently active discussions on introducing regulations and measures to secure the solidarity of the domestic cryptocurrency market, and these efforts are expected to contribute to improving the reliability and soundness of the domestic cryptocurrency market in the future.
Introduction
South Korea's cryptocurrency market ranks among the top three in trading volume on the global CEX market, making it an increasingly important region for global liquidity. The country's cryptocurrency legislation is already in place, making it a relatively stable and mature market compared to other countries. However, the South Korean crypto market has unique challenges that threaten investors. In particular, there are frequent issues related to "fishing net pumping," which is the intentional manipulation of prices by speculators, which is more likely to occur in a depressed cryptocurrency market with reduced liquidity.
The mechanism behind fishing net pumping
Fishing net pumping is a price manipulation phenomenon that occurs when a cryptocurrency's deposits and withdrawals are temporarily suspended on a particular exchange. Typically, the price of a particular cryptocurrency rises sharply because the inflow of cryptocurrencies from other exchanges is suddenly cut off, limiting liquidity and causing a sharp increase in demand based on fixed liquidity. Normally, the price of cryptocurrency on an exchange can be arbitraged to achieve "final consistency," i.e., a consistent price as a result. However, the suspension of deposits and withdrawals restricts the movement of cryptocurrency to and from other exchanges, making arbitrage impossible. In addition, the intervention of speculative forces and the increase in speculative demand from retail investors as the price rises also have an impact.
The basic conditions for marginal pumping are as follows. First, deposits and withdrawals of a particular cryptocurrency on the exchange must be suspended. Deposits and withdrawals are suspended in the following situations: hacking incidents, network updates, maintenance, congestion, and other reasons, as well as direct requests from foundations to suspend deposits and withdrawals, or the exchange's own system maintenance. Second, it needs enough capital and speculative power to intentionally drive up the price. In this process, unlike normal cryptocurrency trading methods, the price may be manipulated through multi-account rotational trading, bot trading, etc.
Cases of fishing net pumping in the Korean cryptocurrency market
In August 2023, South Korean exchanges Upbit, Bithumb, and Coinone suspended their deposit and withdrawal services until the vulnerability in Curve Finance was resolved. During this period, the price of Curve (CRV) went through a steep increase, resulting in the so-called "fishing net pumping" phenomenon. If you check the peak price during the period for each exchange, you can see that prices of Curve in Bithumb (USD $5.5), Coinone (USD $3), and Upbit (USD $1) are all significantly higher than the global average price of USD $0.6. In the case of Bithumb, the difference is especially significant. There is a sharp increase of about 938% from the global average price level, with an immediate drop back to the average price after the resumption of deposits and withdrawals.
In September 2023, following the Aptos fraudulent deposit incident on the Upbit exchange, deposits and withdrawals on the exchange were suspended for half a day, causing instantaneous price spikes. This occurred independently of the average price movement on global exchanges, with a steep increase of about 72% from the average price, reaching up to USD $7.05.
As such, it is not uncommon in Korea for the price of cryptocurrencies to rise sharply depending on whether each exchange suspends deposits and withdrawals. Having learned this, retail investors in Korea have come to recognize the suspension of deposits and withdrawals as an indicator of price increases, and have even begun to watch for suspension notifications. However, 'fishing net pumping' does not necessarily occur in response to the suspension of deposits and withdrawals. Rather, it is a form of price manipulation by certain speculative forces, so it is necessary to be cautious about investing rather than simply expecting the price to rise.
Legal sanctions for fishing net pumping
Fishing net pumping is a non-economic negative externality that intentionally manipulates the price of cryptocurrencies and threatens the health of the Korean cryptocurrency market, and it is expected that legal means to sanction it are essential. Currently, there are no clear regulations to legally sanction it. The traditional financial market responds to unfair trade behavior such as price manipulation with severe penalties. Cryptocurrency is not classified as a financial investment product, making it difficult to apply existing capital market laws.
Even for cryptocurrencies, some penalties can be imposed if intent can be confirmed, but it is difficult to determine the intent of price manipulation. Thus, fishing net pumping in the cryptocurrency market is still a frequent occurrence. Even though the Financial Supervisory Service has a large number of personnel for management supervision, price manipulation in the stock market is hard to crack down on. It is expected to be even more difficult in the cryptocurrency market, where there is a significant lack of personnel and legal mechanisms to monitor it. Therefore, there is an urgent need to establish legal and technical safeguards to monitor and sanction cryptocurrency price manipulation in Korea.
Conclusion
The South Korean cryptocurrency market is considered a mature market with international attention, but its health is threatened by price manipulation issues such as "fishing net pumping". Since it is not possible to restrict exchanges from stopping cryptocurrency deposits and withdrawals, a thorough response to the speculative forces that exploit it will be necessary.
In Korea, various measures are being taken to prevent intentional price manipulation of virtual assets. First of all, the government is focusing on preemptively detecting suspicious transactions related to virtual assets through the formation of the Virtual Asset Task Force, which includes an analysis team composed of experts from the National Tax Service, the Financial Intelligence Unit (FIU), and the Financial Supervisory Service. In addition, the Cyber Investigation Division of the Supreme Prosecutors' Office is in the process of developing a virtual asset tracking system, which is expected to promptly detect and respond to abnormal transactions. Finally, discussions are underway to enact the Virtual Asset Industry Rights Act, which is expected to provide effective sanctions for intentional manipulation of the virtual asset market.
In summary, the introduction of regulations and measures to secure the soundness of the domestic virtual asset market is being actively discussed, and these efforts are expected to contribute to the improvement of the reliability and soundness of the domestic virtual asset market in the future.
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