A major controversy has erupted in the financial sector of South Korea after an audit revealed that millions of dollars in government debt relief—funds explicitly intended to save drowning small businesses—were paid out to individuals holding significant cryptocurrency assets.
The Board of Audit and Inspection (BAI) disclosed this week that the “New Start Fund” provided approximately 22.5 billion won ($16.3 million) in principal reductions to 269 individuals who were secretly sitting on large crypto portfolios. The findings have sparked public outrage and prompted immediate calls for legal reform from the Financial Services Commission (FSC).
The ‘New Start’ Blunder
Created in October 2022, The New Start Fund (Saechulbal Fund) provides resources to self-employed people and entrepreneurs in South Korea affected by COVID-19. The programme is administered by the Korea Asset Management Corporation (KAMCO) and allows those who qualify based on proof of insolvency to restructure their debt aggressively, including cutting 60%-80% off the amount owed depending on how much of a loss the borrower records through the restructuring process.
According to the BAI’s Auditing Information Report, there were major deficiencies in the program’s eligibility screening process since KAMCO was unable to see an applicant’s digital assets because the processes used to review applications did not have the ability to evaluate the overall picture of all types of assets held by applicants as KAMCO could not view cryptocurrency. This “blind spot” allowed traders to plead poverty on paper while holding fortunes in digital wallets.
The Case of ‘Mr. B’
The audit called out many very troubling examples of the way this program has failed. Among them is the case of Mr. B. This is someone who applied for assistance in July of last year and said he was in financial trouble. The program helped him by giving him a 77% reduction in his debt under the program rules and forgiving about $62,350 of his debt. However, the auditors discovered that when Mr. B was applying for assistance, he had more than 430 million won (about $311,000) worth of cryptocurrency assets. In another example, a borrower provided assistance after he had gifted 600 million won (approximately $435,000) to his child for property less than three months before that, further emphasizing the difficulties this program has with identifying the movement of hidden assets.
A Regulatory Blind Spot
The core of the issue lies in KAMCO’s lack of legal authority. Unlike the National Tax Service, which has been granted expansive powers to seize crypto from tax evaders, KAMCO does not have the statutory right to demand data from crypto exchanges without a borrower’s consent.
“The commission said it was currently impossible for KAMCO to know whether New Start recipients have crypto unless borrowers make ‘voluntary declarations,'” the report noted. In a system relying on the honor system, dishonest actors were effectively incentivized to hide their digital assets to qualify for free money.
The ‘Moral Hazard’ Debate
In South Korea, this news has created another firestorm of controversy regarding a concept called moral hazard — it is the risk that providing safety nets will promote reckless behaviour. Some critics say that in essence, the government’s actions amount to providing a form of subsidy to taxpayers for speculative trades, thereby punishing honest entrepreneurs who’ve exhausted their resources through means of legitimate business practices for the benefit of those who can hide their wealth in cryptocurrency.
The timing couldn’t be more critical, as the Korean economy continues to struggle with high levels of household debt and stagnant growth, and the public outcry over the government’s decision to nullify the debts of people who have become rich from cryptocurrency, while the majority of Koreans are dealing with increased costs of living due to inflation, is putting tremendous pressure on the Financial Supervisory Commission (FSC) to take action.
Closing the Loophole
In response to the scandal, Shin Jin-chang, chair of the Financial Services Commission, has vowed to overhaul the system. However, regulators have conceded that administrative changes alone are not enough; the law itself must change.
“If lawmakers vote in favour of a proposed amendment, currently pending in the National Assembly, KAMCO will gain new powers,” Shin explained to the Yonhap news agency. “KAMCO would be able to determine the unlisted stocks and cryptoassets held by fund recipients — even without their consent.”
This proposed amendment would bring KAMCO’s investigative powers in line with other government bodies. Recently, local governments have successfully used new legal tools to seize crypto from citizens with outstanding traffic fines and unpaid water bills, proving that the technology to track these assets exists—if the legal permission is granted.
Until the National Assembly acts, however, the New Start Fund remains vulnerable, leaving regulators to play a game of catch-up with a financial landscape that has evolved faster than the laws designed to govern it.
