Abstract
The Kimchi premium – the gap in cryptocurrency prices in Korean exchanges compared to US counterparts – soared up to 20.8% on 19 May 2021. However, due to capital controls and financial regulations on virtual currencies in South Korea, it seemed that most profits from the Kimchi premium were exploited by foreign arbitrageurs. Using confidential administrative data for 1,211 foreign exchange business institutions in South Korea, this study reveals that the Kimchi premium is positively related to the upsurge of overseas remittances to China, which used to be the world’s largest cryptocurrency mining hub until all cryptocurrency transactions were banned in 2017. Our findings imply that Chinese arbitrageurs use Korean financial institutions as bitcoin-cashing outlets, converting virtual currencies into fiat ones while the Kimchi premium was persistently high.
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