The tug of war between crypto exchanges and the government has ended, as a new law comes into place in South Korea.
South Korea’s crypto industry is currently undergoing one of the biggest shake-ups in history. Since 2017 crypto exchanges have been tackling the government, as there was no clarity on the law passed restricting the use of anonymous accounts in cryptocurrency trading, as well as local financial institutions from hosting Bitcoin futures transactions.
In a view to provide clarity, South Korea has passed new legislation in March 2021 to strengthen the supervision of crypto/virtual assets.
Under new regulations, all virtual-asset businesses, whether they sell, buy, exchange, store or broker, must register with the Korea Financial Intelligence Unit (KFIU), an arm of the Financial Services Commission (FSC) by 25 September 2021.
Those failing to do so and continuing to operate will attract punishments of up to five years in prison and 50 million won fines.
Registered crypto/virtual asset businesses will be responsible for preventing money laundering, verifying the identity of customers and reporting suspicious exchanges.
Over 60 crypto exchanges
All accounts must be opened under a person’s real identity. The government estimates that there are 60 virtual asset exchanges in the country.
Of those 60, only 20 have been certified by the Korea Internet & Security Agency (KISA) for information security management systems, while only four – Upbit, Bithumb, Korbit and Coinone have relationships with banks for the opening of real-name accounts.
In order to register, exchanges are required to be certified by the Information Security Management System, to ensure that their CEO and board members have not been convicted of any crime. Exchanges will also have to provide proof of adequate levels of deposit insurance to cover losses from hacks.
As anonymous traders are in large number and account for over 30% of the crypto trading volume globally, from January 2021, South Korea began enforcing a law that requires the name on cryptocurrency investors’ bank account match the name on their account at a cryptocurrency exchange in order to deposit money into their virtual wallets.
With exchanges now required to ensure their customers have real-name bank accounts, they are also required to partner with domestic banks to establish real-name accounts for their clients.
In order to lessen the appeal of crypto/virtual assets, The Bank of Korea is also planning to initiate a pilot project for the development of a central bank digital currency (CBDC).
From May 2022, any income generated from crypto/virtual assets will have to be reported to the tax agency. The government will impose a 20% tax on income exceeding 2.5 million won.
Banks backing crypto exchanges to meet new rules
South Korean crypto exchanges which were looking to shut operations have received a reprieve from the banks.
All top four cryptocurrency exchanges are expected to operate normally after the 25 September 2021 registration deadline as the three smaller players have finally succeeded in extending real-name account service contracts with their bank partners.
NH Nonghyup Wednesday agreed to extend such contracts with Bithumb and Coinone, the country’s second and third-largest cryptocurrency exchanges, for another six months, allowing them to file for registration with the Financial Intelligence Unit (FIU) to continue operation. Korbit, the fourth largest player, won a consent from Shinhan Bank on the same day with their contract details to be announced later.
FSC to oversee crypto business
The Financial Services Commission (FSC) will oversee virtual asset businesses, set regulations for them and prevent money laundering with cryptocurrency.
FSC Chairman Eun Sung-soo has recently said that the government does not recognize cryptocurrencies and added that investors have to take responsibility when investing in virtual assets as they are not recognized as a currency or a financial product.
For the last few years, the government has been investigating virtual assets. In 2018, 62 fraud cases were investigated and 139 people arrested, whereas in 2020, cases have increased to 333 cases and 560 people have been arrested for cryptocurrency fraud.
South Korea is not alone in tightening regulations on virtual assets. The EU is considering proposals to regulate crypto assets, while the United States transfers of $10,000 or more in crypto assets need to be reported to the IRS.
China has banned the use of cryptocurrency for transactions and is cracking down on mining operations. The UK, Japan and Germany have all halted activities or issued warnings about Binance, one of the world’s largest cryptocurrency exchanges. The UK has decided that from 2022, all cryptocurrency exchanges must register with the Financial Conduct Authority (FCA) and adhere to anti-money laundering rules.
As crypto/virtual assets become more popular, they are increasingly coming under scrutiny by regulators. South Korea’s efforts to bring virtual assets into the mainstream regulatory infrastructure demonstrate that the process will be challenging. However, in the end consumers will have a safer decentralized financial system.
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