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Jipyong News|KOREA LEGAL INSIGHT

Enforcement of the Amended Act on Reporting and Use of Specified Financial Transaction Information and Regulation of Virtual Asset Transactions

2021.04.19

I. Introduction 
 
On March 25, 2021, the amended Act on Reporting and Use of Specified Financial Transaction Information (the “Act”) came into force. 
 
The Act aims to prevent money laundering and terrorist financing by imposing a variety of obligations on financial institutions, including reporting of high-value cash transactions, know-your-customer requirements, and implementation of anti-money laundering policies. 
 
Prior to amendment, there were growing concerns with the emergence of virtual assets – particularly, that the non-transparent nature of virtual asset transactions may facilitate unlawful transactions and money laundering activities, due in large part to the lack of legal basis to monitor or investigate virtual asset transactions. 
 
In response to such concerns, the Act has been amended to provide a legal basis to regulate virtual asset service providers and set forth regulations to be followed by financial institutions when they engage in transactions with virtual asset service providers. 
 
The amendment bill to the Act was passed at the National Assembly on March 5, 2020 and promulgated on March 24, 2020.  The Enforcement Decree to the Act (the “Enforcement Decree”) and the Regulations on Reporting and Supervision of Specified Financial Transaction Information have also been amended, and came into force as of March 25, 2021.  In addition, the Korean Financial Intelligence Unit (“KoFIU”) of the Financial Services Commission (the “FSC”) and the Financial Supervisory Service jointly published the Manual for Reporting of Virtual Asset Service Providers on February 17, 2021 (the “Reporting Manual”). 
 
 
II. Major Elements of the Amended Act 
 
A. Definition of Virtual Asset Service Providers 
 
The amended Act defines a “virtual asset service provider” as a person who engages in (i) sales and purchases of virtual assets; (ii) exchanges of one virtual asset for another; (iii) transfers of virtual assets; (iv) safe-keeping and administration of virtual assets; (v) brokerage, intermediation or agency services in connection with the sale, purchase and transfer of virtual assets; or (vi) any other acts in respect of virtual assets that have a high probability of being used for money laundering or terrorist financing, as prescribed under the relevant presidential decree (Item (n) of Subparagraph 1 of Article 2, the Act). 
 
While the scope of virtual asset services as defined in the amended Act is very broad, the FSC indicated in its November 2, 2020 press release that the application of the amended Act would be limited to “major virtual asset providers”. 
 
The Reporting Manual classifies major virtual asset service providers into three categories: (i) virtual asset trading service providers; (ii) virtual asset safekeeping and administration service providers; and (iii) virtual asset digital wallet service providers.  However, the following specified entities are excluded: (i) entities that merely provide a platform on which sales and purchases of virtual assets are proposed (e.g., online bulletin boards on which sale and purchase proposals are posted, with actual transactions being executed through the transaction parties’ own or third-party wallets); (ii) entities that merely provide advice or technologies in connection with virtual asset transactions; (iii) entities that merely provide programs that store individual encryption keys without any involvement in the sale, purchase or exchange of virtual assets and lack authority for independent control; and (iv) manufacturers of hardware wallet services, including cold wallets. 
 
B. Definition of Virtual Assets 
 
The amended Act defines “virtual assets” as digital tokens with economic value that can be digitally traded or transferred (including all rights in connection therewith).  However, the following items are excluded: result objects acquired from videogames, prepaid electronic payment methods, e-money, electronically registered stocks, electronic notes, electronic B/L (subparagraph 3 of Article 2, the Act), electronic receivables and mobile gift certificates (Article 4, the Enforcement Decree). 
 
C. Obligations of Virtual Asset Service Providers 
 
(1) Reporting Requirements 
 
A party wishing to engage in a virtual asset business must file a prior report with the KoFIU, and all existing service providers who fall under the classification of “virtual asset business provider” as defined in the amended Act must report themselves as virtual asset service providers within six months from the enforcement date of the Act (i.e., September 24, 2021) (Article 7 and Addendum 1, the Act).  Any party engaging in a virtual asset business without such reports will be subject to a maximum of five (5) years imprisonment or KRW 50 million fine (Article 17, the Act). 
 
(2) Requirements for Real-Name Accounts 
 
In principle, virtual asset service providers may engage in financial transactions using real-name accounts only (accounts that allow financial transactions only between the account of a virtual asset service provider and the account of its customer established with the same financial institution) (subparagraph 2 of Article 7(3), the Act). 
 
The Enforcement Decree prescribes the following additional requirements for virtual asset service providers in order to establish real-name accounts with financial institutions: (i) segregation of customer deposits from their own assets; (ii) certification of its Information Security Management System by the Korea Internet and Security Agency; (iii) separate management of customer transaction records for each customer; and (vi) assessment of money laundering risks associated with virtual asset service providers by financial institutions (Paragraphs (1) and (2) of Article 10-18, the Enforcement Decree). 
 
(3) Anti-Money Laundering Obligations (KYC Procedures, Reporting of Suspicious Transactions, Etc.) 
 
Virtual asset service providers are subject to the same anti-money laundering obligations applicable to financial institutions, including reporting of suspicious transactions, reporting of high-value cash transactions, and implementation of know-your-customer procedures (Articles 4, 4-2, 5 and 5-2, the Act).  In addition, a virtual asset service provider may not engage in brokerage services for the sale, transfer or exchange of virtual assets between its own customer and a customer of another virtual asset service provider, unless such other virtual asset service provider has fulfilled its own anti-money laundering obligations with domestic or foreign regulatory approval. 
 
(4) Provision of Information upon Transfer of Virtual Assets: “Travel Rule” 
 
The amended Act and its Enforcement Decree impose an obligation on virtual asset service providers to provide information related to virtual asset transactions involving a transfer of any virtual asset worth KRW 1 million or more to another virtual asset service provider (the “Travel Rule”). 
 
The financial authorities have granted a grace period of one year on supervising and regulating the Travel Rule to allow the industry to establish a system for sharing information among virtual asset service providers; actual implementation of the Travel Rule will thus commence on March 25, 2022. 
 
 
III. Conclusion 
 
With the amendments to the Act and other relevant regulations, many changes in the virtual asset business industry are expected. 
 
While the amendments to the Act are expected to enhance legal certainty and transparency in virtual asset transactions, the amended Act clearly has its limits.  As the legislative purpose of the amendments were heavily focused on preventing money laundering and terrorist financing, it is continuously suggested that the virtual asset industry needs to be further regulated through creation of entry barriers and comprehensive regulations on business activities, in addition to the Act. 
 
It will be interesting to see how Korean laws and regulations will be further developed in response to such suggestions and the rapid growth of the virtual asset industry. 
 
Jipyong’s Digital Finance Group and Fintech Team have vast experience in advising on regulations pertaining to digital finance and e-commerce transactions, fintech and platform businesses, and innovative financial services (sandbox regulations).  We will continue to monitor and regularly update our clients on changes in the regulations applicable to electronic finance businesses.

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