South Korea faces strict crypto regulation and fears of centralization

From real-name account buying and selling to investigating people utilizing cryptocurrencies to evade taxes, authorities officers in South Korea are enacting stricter rules to supervise the cryptocurrency business within the nation. These measures typically require digital foreign money companies to supply detailed buyer information and transaction information to the related authorities.

With these stringent measures typically comes a rise in the associated fee of compliance for exchanges and different crypto service suppliers. Privacy issues are one other problem amid the swath of information being offered to authorities companies.

However, this strict regulatory local weather has accomplished little to dampen the keenness for cryptocurrencies in South Korea. Crypto buying and selling within the nation continues to achieve extra traction, with alternate traders in line for significant price gains in shares amid the present upsurge in digital currency activity within the nation.

Data from South Korea’s National Tax Service, or NTS, exhibits an increase in the number of crypto investors within the nation over the previous 12 months. This surge in market individuals has additionally triggered an eightfold improve in buying and selling quantity such that the crypto enviornment not too long ago overtook the inventory market, albeit briefly, in day by day buying and selling quantity.

South Korea’s tightened crypto rules are additionally coming amid updates to the Financial Action Task Force’s, of FATF’s, pointers on cryptocurrency rules. The intergovernmental physique continues to name for heightened restrictions on the crypto house, predicated on exerting strict oversight of centralized entities like exchanges and custodial companies.

Specific Financial Transactions Act

On March 25, up to date cryptocurrency rules underneath the Act on Reporting and Using Specified Financial Transaction Information, generally known as the Specific Financial Transactions Act, will come into impact in South Korea. These new legal guidelines herald important coverage adjustments for digital asset service suppliers, or VASPs, within the nation.

For one, all VASPs — exchanges, custodians, asset managers and pockets service suppliers — have to be licensed to function within the nation. Exchanges should additionally keep relationships with native banks to make sure obligatory real-name account buying and selling.

For South Korean officers, the insistence on real-name crypto buying and selling accounts is a component of efforts to fight cash laundering through cryptocurrencies. This rule requires exchanges to acquire and renew sure license approvals from lenders within the nation.

By partnering with native banks and requiring real-name buying and selling accounts, South Korean regulatory and legislation enforcement companies can have entry to crypto transaction information for his or her numerous investigative functions. Crypto companies within the nation should abide by strict monetary reporting requirements following the brand new legal guidelines coming into impact later in March.

The Korea Financial Intelligence Unit, or FIU — an arm of South Korea’s Financial Services Commission liable for Anti-Money Laundering oversight throughout the nation’s monetary sector — will police the actions of cryptocurrency companies. These VASPs now have till Sept. 24 to come back into full compliance with the brand new reporting requirements.

Exchanges, pockets suppliers, asset managers and different crypto companies underneath the VASP classification should flag suspicious transactions and report them to the FIU for subsequent cash laundering investigations. Also, new VASPs trying to function within the nation should register with the FIU earlier than servicing prospects in South Korea.

Meanwhile, South Korea’s NTS can also be focusing its consideration on the crypto house in efforts to fight tax evasion. However, with crypto taxation legal guidelines but to come back into impact, the NTS is people trying to evade state taxes by hiding their wealth in digital property.

The NTS not too long ago recognized greater than 2,400 people who hid over $32 million in assets from the government. As half of the investigation, the tax company requisitioned buyer information from main crypto exchanges within the nation and is even reportedly planning to conduct a deeper probe into some of the individuals within the tax evasion scheme.

The price of compliance

Binance Korea shut down its operations again in December 2020, lower than a 12 months after its preliminary launch. At the time, the platform recognized low liquidity and declining transaction volumes as the explanation for its resolution to close up store.

However, there was some hypothesis that incoming rules prohibiting order guide sharing amongst cryptocurrency exchanges was the explanation for Binance’s resolution to shutter the platform. Now, with the brand new regulatory normal solely days away, OKEx has additionally shut down its platform within the nation.

Of the over 100 cryptocurrency exchanges within the nation, solely the “big four” — Bithumb, Upbit, Korbit and Coinone — maintain partnerships with native lenders to allow real-name account buying and selling. These platforms that account for the majority of the crypto buying and selling quantity in South Korea are probably the one ones succesful of bearing the associated fee of compliance related to buying the required licensing approvals from business banks.

For one, to acquire banking partnerships within the nation, exchanges should develop strong information safety administration protocols. Also, their principal executives will need to have clear felony information.

Additionally, exchanges should present proof of satisfactory deposit insurance coverage to cowl losses from any hacks. Indeed, South Korean exchanges have been victims of numerous cyberattacks purportedly from North Korean hackers sponsored by authorities in Pyongyang.

Earlier in March, Bithumb introduced plans to upscale its AML protocols. As half of these efforts, the South Korean crypto alternate big has begun using AML instruments and options developed by blockchain intelligence agency Chainalysis.

For smaller exchanges in South Korea, the associated fee of compliance introduced on by these measures may show considerably burdensome, resulting in a raft of exits from the nation. Such a state of affairs may result in a monopolized cryptocurrency trading market within the nation, with just a few individuals left within the enviornment.

Privacy issues

When in-house options are insufficient to make sure compliance with these rules, exchanges typically flip to third-party companies. According to Alice Nawfal, co-founder of Travel Rule-compliance platform Notabene, her firm is working with a number of crypto companies in South Korea. In a dialog with Cointelegraph, Nawfal revealed:

“South Korean exchanges have a 6-month grace period starting March 2021 to implement the Travel Rule. None of them to our knowledge are live yet but are actively exploring how to comply with this. Notabene is currently in talks with several Korean VASPs on how we can help them comply with the new rules.”

Counterparty information-sharing typically comes with privateness issues, and the crypto rules quickly to be in impact in South Korea are probably no completely different. Indeed, related points have been raised with the FATF’s Travel Rule, which requires VASPs to share buyer information throughout a number of jurisdictions.

For the FATF, the rules are all about bringing the crypto house to an analogous regulatory normal as gamers within the legacy finance enviornment. In a press release to Cointelegraph, a spokesperson for the FATF argued:

“The FATF puts the same obligations on virtual assets and their service providers as any other financial business. The FATF is not singling out any form of crypto or cryptocurrency, the FATF is bringing them up to the same standard as banks, money service businesses, securities dealers, and others in the financial sector.”

Despite a number of reviews displaying that illicit transactions represent a minute portion of world cryptocurrency commerce, the FATF nonetheless maintained that digital currencies may be misused for unlawful actions, including:

“Money laundering fuels serious crime and terrorism. The threat of criminal and terrorist misuse of virtual assets is serious and urgent. The FATF expects all countries to take prompt action to implement the FATF Recommendations in the context of virtual asset activities and service providers.”

Back in April 2020, the FATF assessed South Korea’s efforts in combating cash laundering and terrorist financing. At the time, the intergovernmental physique praised the nation’s “sound legal framework” whereas calling for extra work to be accomplished within the anti-graft enviornment, particularly regarding corruption amongst authorities officers.