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Amendment to the Specified Financial Transaction Information Act and Regulation of Cryptocurrency in Korea

2021.06.21

The cryptocurrency market is back in the spotlight.  Bitcoin prices experienced a meteoric rise in late 2017 and early 2018 when the price of 1 BTC reached KRW 25 million, before plummeting to approximately KRW 3 million by early 2019.  While the price appeared to stabilize at around KRW 15 million thereafter, a confluence of factors such as the cryptocurrency industry’s continued growth, worldwide increase in liquidity due to the COVID-19 pandemic, and global financial institutions’ market entry has seen the price of bitcoin skyrocket to KRW 70 million by this April.  At one point, the total daily transaction amount of the 14 cryptocurrency exchanges in Korea (approx. KRW 20.883 trillion) even surpassed that of the KOSPI, Korea’s stock market index (approx. KRW 14.53 trillion). 
 
Amidst such frenzy, there have been growing concerns about a potential market crash and the resulting harm to investors – many of whom are individual traders.  When the Chairman of Korea’s Financial Services Commission commented that it would be difficult to regulate cryptocurrency and systematically protect investors as cryptocurrencies are highly speculative and without inherent value, the market responded instantly; the price of major cryptocurrencies such as bitcoin plunged to panic levels reminiscent of 3 years ago.  That said, the past 3 years has not been without some legislative and systematic efforts in Korea to regulate cryptocurrencies and, more generally, the blockchain industry as a whole. 
 
An important example is the recent amendment to the Act on Reporting and Using Specified Financial Transaction Information (the “Act”) that became effective as of March 25, 2021.  The new amendment defines “virtual assets” as digital tokens with economic value that can be digitally traded or transferred, and “virtual asset service providers” (“VASPs”) as virtual asset trading service providers, virtual asset safekeeping and administration service providers, and virtual asset digital wallet service providers that are engaged in the purchase and sale, exchange and transfer, safekeeping and administration, intermediation and brokerage of virtual assets and virtual asset transactions.  Under the new amendment, all existing businesses that qualify as VASPs are required to register with the Korea Financial Intelligence Unit (KoFIU) by September 24, 2021.  Criteria for evaluating such VASPs include whether certification of information security management systems (ISMS) has been obtained, whether the VASP uses real-name bank accounts, and whether the representatives and directors of the VASP meet the necessary prerequisites. 
 
As VASPs are now regulated under the Act, they must abide by the obligations imposed on all financial organizations regulated under the Act.  Such obligations include: anti-money laundering requirements such as reporting of suspicious transactions, reporting of high-volume cash transactions, and customer identity verification.  VASPs are also subject to additional requirements in consideration of the special nature of virtual assets.  For instance, a VASP is prohibited from serving as an intermediary for the sale or exchange of virtual assets between its own customers and customers of another VASP.  VASPs are also prohibited from trading in cryptocurrencies with built-in measures to obfuscate transaction records such as so-called “dark coins.” 
 
While it is encouraging to see that important strides are being taken to regulate cryptocurrencies and imbue a measure of legal stability and transactional transparency, it remains to be seen whether these new amendments to the Act would enable appropriate and sufficient regulation of the cryptocurrencies in the long run.  Some of such uncertainty stems from the fact that the Act is targeted at regulating illegal activities that may arise in the cryptocurrency industry, such as money laundering and funding terrorist activities, instead of the industry as a whole.  Subjecting VASPs to the same requirements as financial institutions to ensure transaction transparency and track and prevent illicit activities such as money laundering is justified.  However, there are still a myriad of other issues with cryptocurrencies on which the Act is silent and no appropriate regulation exists. 
 
For instance, the law is still unsettled on: whether cryptocurrencies may be deemed as securities under the Financial Investment Services and Capital Markets Act (especially investment contract securities); how to classify so-called “stablecoins” – cryptocurrencies where the price is pegged to outside assets such as the US dollar – and their value retention and payment function; whether initial coin offerings (ICOs) are still prohibited in Korea, despite there being no statutory basis for such prohibition; and how to regulate the so-called “pump and dump” schemes and protect individual investors. 
 
Cryptocurrencies and blockchain technologies are no longer the sole province of small-group enthusiasts.  From its humble and controversial beginnings, the cryptocurrency industry has grown exponentially over the years through innovation, trial-and-error, and competition.  While still in its early stages and not quite comparable to established financial systems, the potential for growth is significant.  It is thus disappointing that the Korean government has yet to formally recognize the cryptocurrency industry as an established financial industry and instead chooses to regulate it only peripherally, such as with respect to taxation or illicit activities.  To accurately appreciate the societal impact of cryptocurrency and ensure its proper and sufficient regulation to protect individual investors, there should be more progressive efforts to regulate the VASPs or, at the very least, cryptocurrency exchanges.  Higher requirements for entry (such as capital, human resources, and governance), regulation of business activities, user protection, and disclosure regulations could be the first steps.  The time for viewing cryptocurrencies as criminal money laundering methods or risky speculative investments is long past.

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