Ethereum and bitcoin tumbled overnight, after South Korea banned local initial coin offerings and margin trading in cryptocurrencies. According to Joongang and Bloomberg, the Financial Services Commission in Seoul said all forms of ICOs are prohibited in the country, including "projects that share profits, rights, dividends, and other "coin-style" offerings, according to a statement."

The commission also banned margin trading, i.e., the practice of loaning funds to trade currencies including bitcoin and ethereum, according to an official who clarified the statement. The government plans to investigate any violations and deal with them strictly even before its measures are legislated, it said in the statement.

The announcement triggered a sell-off in crypto markets with Ethereum, which has become a platform for most ICOs, dropping 5.7% while bitcoin fell as much as 3.5%.

“They saw that the best practice was just to ban it before allowing any major crisis to occur, which would have impacted a lot of retail investors there,” Thomas Glucksmann, head of marketing at Hong Kong-based bitcoin exchange Gatecoin told Bloomberg. “Similar to China, they probably didn’t want to ban it, but they didn’t want to take any risk about it getting out of hand.”

“The majority of ICO tokens are being issued through the ethereum platform,” said Glucksmann. “At any sign of vulnerability, the first reaction would be a mass selloff in ether. That’s why the price of ether is susceptible.”

While not nearly as draconian as the Chinese crackdown launched last month which banned all cryptocoin exchange trading, the announcement was the second major blow to cyrptos this month, following Beijing's ban of ICOs and subsequently, all cryptocurrency trading. Public interest in cryptocurrencies has surged this year - especially in Japan and South Korea which have emerged as the dominant trading centers - prompting officials to issue warnings about an overheated market and fraudulent activity.

While ICOs have been used to raise more than $2 billion this year, the lack of oversight has attracted criminals, with some estimates showing about 10 percent of all ICO funds being stolen by thieves.

According to Bloomberg, South Korea have prosecutors recently caught four cryptocurrency traders who illegally raised 25 billion won ($22 million) from 1,000 investors in a pyramid scheme growing in scale, the South Korea commission said. This month authorities also indicted four people on charges of illegally trading cannabis using bitcoin, the commission said.

South Korea also sees bitcoin as potentially vulnerable to North Korean hacking. Its national police agency said this week it confirmed North Korean hackers tried unsuccessfully to hack four bitcoin exchanges using emails containing malicious codes between July and August.

While the move has predictable has an adverse initial impact on cryptos, many have contended that a crackdown on ICOs, many of which are glarindly illegal and outright ponzi schemes, will extend the long-term viability of bitcoin and ethereum. Countries including the U.S., Canada, Singapore and Hong Kong have also issued warnings about ICOs this year, although none has gone so far as to ban the practice. “It would shock me if you don’t see pump-and-dump schemes in the initial coin offering space,” U.S. Securities and Exchange Commission Chairman Jay Clayton said Thursday in Washington.

Separately, in the Ethereum investment section on Reddit, user "theoneandonlyeric" provided some additional color on the South Korean crackdown:

I'll give more clarification. Yes, the Korean government is currently only banning credit-granting activities, AKA margin trading within the exchanges. There is no proof or evidence saying that it will ban it entirely, yet. According to Joongang (one Korea's largest news outlets) they state that, "there is no regulation on individual investors' investment behavior within the ICO ban." It is possible for domestic investors to participate in ICOs conducted by FOREIGN companies." Participation is a different story. Banning it entirely, which is China's case would be devastating. This is not confirmed, but in the long run, Korea might come down to heavy regulation only. The complete ban of ICOs will hinder technological development within Korea. There would be no way it would be completely banned.

Despite the ongoing ICO crackdowns and relentless rhetoric against cryptos, Bitcoin has regined the $4,000 level having dropped as low as $3000 two weeks ago following harsh commentary from Jamie Dimon who called cryptos a "fraud" and comparing it to the 17th century tulip craze. The statement prompted a spirited defense from Macquarie's Viktor Shvets who noted that the modern financial system is just as much of a "fraud" as bitcoin.