South Korea tightens cryptocurrency regulations – the Diplomat
In March, South Korea passed new legislation to strengthen oversight of virtual assets. The new law, however, has led to a pullback from banks and fears that many altcoin and cryptocurrency exchanges that have sprung up in South Korea could be bankrupted.
Under the new legislation all virtual asset management providers, which include cryptocurrency exchanges and other virtual asset service providers, must register with the Korea Financial Intelligence Unit (KFIU) to operate in South Korea. The KFIU is the arm of the Financial Services Commission (FSC) responsible for combating money laundering and exchanges would be required to report any suspicious financial activity to it.
To apply, the exchanges must be certified by the Information Security Management System, ensure that their clients have real name accounts, and ensure that their CEO and board members have not been convicted of a crime. The law also requires that scholarships provide evidence of adequate levels of deposit insurance to cover losses due to hacks.
In January, South Korea also began to impose a requirement that the name on the bank account of cryptocurrency investors match the name of their account in a cryptocurrency exchange in order to Deposit money in their virtual wallets. With stock exchanges now required to ensure their clients have real name bank accounts, they are also required to partnership with national banks establish real name accounts for their clients.
However, South Korean banks have been reluctant to associate with cryptocurrency exchanges due to negative comments from regulators on virtual assets and the risk of financial crimes on cryptocurrency exchanges. Instead, banks are looking to limit their liability for cryptocurrencies as the government tightens regulations. They called on the government to release them from their responsibility for money laundering or other financial crimes on cryptocurrency exchanges.
The reluctance of banks to partner with cryptocurrency exchanges means that all South Korean cryptocurrency exchanges, except a few, could be forced to shut down. To continue to function, the exchanges must partner with a South Korean bank, but with South Korean banks unwilling to take the risk of cryptocurrency exchanges, they will not be able to register with the government or withdraw money for cryptocurrency trading after September 24.
The banking requirements of the new law are in line with the recommendations of the Financial Action Task Force on Virtual Assets on KYK rules. These rules are designed to prevent money laundering and other financial crimes. However, the prospect of a number of exchanges closing has many consider continuing government and FSC.
The deadline is also pushing cryptocurrency exchanges to take action. The main exchanges in South Korea started to remove or place warnings on virtual assets that they consider risky. The step also gave rise to legal action. Upbit’s decision to withdraw from the list 24 cryptocurrencies has resulted in a series of lawsuits against the cryptocurrency exchange.
Adding to the pressure on cryptocurrencies in South Korea, the government has confirmed it will move forward with a previously announced announcement 20% capital gains tax on virtual asset transactions next year. Seoul also took steps to ban the exchange of issued coins and began to seize crypto assets tax evaders. The Bank of Korea is also considering start a pilot project for the development of central bank digital currency (CBDC), which could reduce the attractiveness of virtual assets.
There are good reasons for the decision to strengthen regulation of virtual assets. South Korea is estimated to represent 10 percent global crypto transactions. The intensity of trading has seen cryptocurrencies such as Bitcoin trading at a 20 percent premium in South Korea, while 90% of trade is in altcoins.
The largely unregulated industry has been a source of both criminal activity and financial crime. According to South Korean law enforcement estimates, cryptocurrency-related crimes have resulted in losses of $ 4.9 billion since 2017. They are also popular targets for North Korea’s financial crimes.
South Korea is not alone in tightening regulations on virtual assets. the Basel Committee on Banking Supervision called for the cryptocurrency to face the strictest capital rules of all assets. The Bank for International Settlements, made up of central banks, has noted that cryptocurrencies “Work against the public good” and raised concerns on the use of cryptocurrencies in money laundering and financial crimes. The EU is review of proposals regulate cryptoassets, as the United States demands greater regulation of crypto-assets and will now require that transfers of $ 10,000 or more in cryptoassets be reported to the IRS.
The US and the EU aren’t the only ones taking tougher measures against virtual assets. China has banned the use of cryptocurrency for transactions and is crack down on mining. the UK, Japan and Germany have all halted their activities or issued warnings regarding Binance, one of the world’s largest cryptocurrency exchanges. Bianance’s problems in the UK stem from a decision in 2022 to require cryptocurrency exchanges to register with the Financial conduct authority (FCA) and adhere to anti-money laundering rules. Ninety percent of UK cryptocurrency seekers have abandoned their applications register with the FCA rather than abide by anti-money laundering rules.
As virtual assets become more popular, they are increasingly monitored by regulators to ensure that this new asset class does not become a safe haven for money laundering and financial crimes. As South Korea’s efforts to integrate virtual assets into traditional regulatory infrastructure show, the process will be difficult, especially with banks reluctant to shoulder the burden of potential financial crime. The end result, however, will be a more transparent and secure system for consumers.