How South Korea’s recent regulation is set to put them at the forefront of the global Cryptocurrency movement
Written by: Bradley Moon
Source: https://coin.guru/pages/bitcoin-explained-what-is-bitcoin-blockchain-btc-cryptocurrency-token
Introduction
Cryptocurrency is one of the most significant developments of the 21st century, with the creation of Bitcoin in 2009 giving rise to a mostly unregulated and sceptical market. South Korea was among the initial cryptocurrency enthusiasts, with one third of salaried workers investing into this market.[1] In 2017, the South Korean Won was the third most used currency when buying or selling cryptocurrencies, accounting for 6.5% of all transactions.[2] Despite the prevalence of enthusiasm and entrepreneurship in South Korea, they have received scrutiny for their lack of regulation surrounding this market. The Financial Action Task Force (FATF) is an intergovernmental organisation which aims to prevent money laundering and terrorism funding. Whilst South Korea’s Act on Reporting and Use of Specific Financial Information aims ‘to regulate money laundering and financing of terrorism through financial transactions’, the Act does not cover virtual assets.[3] Consequently, the FATF has singled out South Korea as being particularly weak in protecting such assets in the cryptocurrency market. Hence, South Korea has been coined the ‘Wild West’ of cryptocurrencies.[4]
However, in response to this, South Korea’s National Assembly passed a suite of bills in March 2020 that amended the Act on Reporting and Use of Specific Financial Information. Cryptocurrencies will now be brought into the scope of this enactment. As such, all virtual asset businesses will now have to comply with regulations preventing anti-money laundering and terrorist funding. In order to leave space for the executive to make further clarifications, the amendments will not come into effect until September 2021. Nonetheless, ‘the passing of the amendment signifies official entry of cryptocurrency trading and holding into the legal system’.[5]
What will these amendments offer?
These bills aim to provide a comprehensive regulatory scheme for digital currency by bringing virtual assets into their current financial regulatory framework. For example, having no prior legal definition of ‘cryptocurrency’ made it extremely hard to be held responsible for money laundering. Ergo, these amendments defined a virtual asset as an ‘electronic certificate with an economic value that may be traded or transferred electronically’.[6] Consequently, the precise wording of ‘transfer’ set out in this definition is able to bring cryptocurrencies into the scope of South Korea’s existing anti-money laundering laws.
Moreover, these amendments will require virtual asset businesses to have the same legal obligations as ordinary financial institutions. This involves implementing the traditional ‘Know your Customer’ (KYC) obligations, such as the use of real-name verifiable accounts.[7] In addition to this, they must maintain a statutory level of record keeping of their clients’ transactions and must report any activity which is reasonably suspected to be in furtherance of money laundering or terrorism.[8] Virtual asset businesses must also obtain an information security management system (ISMS) certification.[9] All of these regulatory changes will further strengthen the protection of data and the prevention of money laundering surrounding cryptocurrency exchanges.
Virtual asset service providers will also now be required to report to Korea’s Financial Intelligence Unit (FIA).[10] Failure to report to the FIA or failure to register a virtual asset business will hold a punishment of 5 years imprisonment and a fine of KRW50 million ($41,000). This punishment should adequately defer businesses from remaining in a ‘legal blind spot’[11] and so will bring cryptocurrency providers into South Korea’s legal framework.
Potential adverse effects of these amendments:
Contrary to these advantages, there has been criticism suggesting that these amendments will have detrimental effects. One issue that may arise is that it may drive businesses into digital currency havens such as Malta, due to the fact that virtual assets will now be susceptible to capital-gains tax. Another disadvantage is that small and midsize digital currency businesses may not be able to afford to keep up with the new compliance requirements. Consequently, in the next year many of these businesses will have to be merged or acquired.
Conclusion:
Despite some concerns, the recent amendments to the Act on Reporting and Use of Specific Financial Information will take cryptocurrencies outside of the legal grey-zone by increasing the transparency, predictability and stability that surrounds them. It gives space for future developments to this market and will give rise to the creation of new digital currency businesses which suits the entrepreneurship culture that exists in South Korea. On top of this, it introduces measures to prevent money laundering and the funding of terrorism, which previously did not exist. Thus, there is little doubt that these amendments will not only be beneficial, but will keep South Korea at the forefront of the global cryptocurrency movement.
Disclaimer: The opinions expressed in this post are those of the authors, and do not reflect the views or opinions of the Durham Asian Law Journal.
[1] Troy Stangarone, 'South Korea Works to Bring Cryptocurrency Into the Mainstream' (The Diplomat, 3 January 2020) <https://thediplomat.com> accessed 28 June 2020 [2] Ibid [3] Art. (1) [4] Mark Grabowski, ‘Cryptocurrencies: A Primer on Digital Money’ (1st edn, Routledge 2019) [5] Brian Newar, 'Amendment to Special Reporting Act Passes – Cryptocurrency Now Fully Legal in South Korea' (TheNewsAsia, 5 March 2020) < https://thenews.asia/amendment-to-special-reporting-act-passes-cryptocurrency-trading-now-legal-in-south-korea/> accessed 28 June 2020 [6] The Act on Reporting and Use of Specific Financial Information, Art. (2) [7] Ibid, Art. (4.4) [8] Ibid, Art. (4.1) [9] Ibid, Art. (5) [10] Ibid, Art. (3) [11] Yoon Young-sil, 'A Korean Lawmaker Stresses Need to Designate Cryptocurrency Special Zone for ICOs' (BusinessKorea, 30 August 2018)<http://www.businesskorea.co.kr> accessed 28 June 2020