The amendment to the Act on Reporting and Use of Specific Financial Information passed this afternoon in a full session of National Assembly. The passing of the amendment signifies the official entry of cryptocurrency trading and holding into the legal system for the South Korean government. A restructuring of the domestic blockchain industry is expected to take place as a result of this event.
One of the main caveats to the enactment of the amendment is that cryptocurrency exchanges will need to comply with reporting requirements. Although the larger exchanges mostly comply with the new rules already, small and medium-sized exchanges may have trouble obtaining the contracts to reach full compliance.
President Jaein Moon must sign the amendment into law to start the enactment process which will be one year from the date of signing, followed by a 6-month grace period. This means that all entities affected by the law will need to be in full compliance by September 2021. The passing of the amendment comes after a lengthy 2-year process of deliberations and trial and error of recommended guidelines but few official laws. Exchanges and companies handling cryptocurrency up to this point have been mostly self-governing in regard to their cryptocurrency, but have run into trouble with how the cryptos are turned into fiat currency.
Exchanges, trusts, wallet companies, and ICO are now required by law to have a real-name verification partnership with an approved Korean bank. Real-name accounts prevent money laundering by assigning a verified individual to a single bank account with which they may withdraw and deposit fiat currency from and to an exchange. Also, companies must obtain an information security management system (ISMS) certification.
Some exchanges already have the real-name verification system on their platform as it was imposed via guidelines set by the FSC in early 2018. The ISMS certification system is granted by the Korea Internet Security Agency (KISA) which certifies that a company can secure key information assets for itself and its users. This certification can be very costly, but all exchanges must comply within 6 months of its enactment or risk being shut down.
The measures imposed by the law will ensure stricter AML and combating the financing of terrorism (CFT) compliance by exchanges mainly.
Up until now, anyone could launch an cryptocurrency exchange in South Korea. By September 2019, there were over 70 exchanges in the country. The saturation of the market has led to a bevy of problems for consumers in the industry. Many have suffered fraud ranging from exit scams and false trading volumes to insider trading and blatant manipulation of the value of some coins.
Local Korean cryptocurrency investors have mixed feelings about the introduction of the new law into the system. Some have applauded the measures proclaiming that a ‘New Coin Age‘ has begun in Korea. Others further noted that “[[cryptocurrency] is nationally recognized as gambling no more.]”
On the other hand, cynical investors have pointed out the futility of such measures. While the security of investors’ assets is objectively increased by these measures, one points out that despite the added security, investors will still lose their money because they will have to pay taxes on their trades. Furthermore, another investor on Coinpan begs the community to see how poorly the stock market is performing with all of its regulations these days – “[with all the new regulations to the cryptocurrency industry, a massive cooldown of the values of cryptos will ensue.]”
There is a concern that investors will suffer further damages as perhaps their preferred exchange closes, charges higher fees, or requires more documentation to continue trading on the platform. By the end of the 6-month grace period, crypto traders in Korea may actually only have 4 to 6 exchanges to choose from since only Upbit, Bithumb, Coinone, and Korbit have the real-name banking system and the previous 4 plus 2 others, GoPax and Hanbitco are utilizing ISMS.
Investors have suffered greatly by the ‘wild west’ regulatory landscape of the cryptocurrency trading industry in Korea in the past few years. Numerous accusations and some guilty verdicts of fraud have been doled out. Upbit has been in the middle fraud accusations for years, as has Bithumb, BOSCoin, Komid, and Newbit, among others. In response to the attempt to rectify the wrongs of the past, Hanbitco CEO Sunga Kim commented, “A foundation has been created to wash away the stigma of cryptocurrency exchanges, fraud, and debauchery and establish itself as a transparent and reliable industry. It will lead the development of the industry with the inflow of new capital.”
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