South Korea: Latest developments on crypto and regulation

Key takeaways:

  • It could be tricky for Korean exchanges to comply with the newly implemented AML/CTF regulations.
  • South Korea could start its CBDC pilot test later this year.
  • The country is also focusing on preventing crypto from being used for ML purposes.
  • Crypto taxation will be implemented in January 2022.

In the last few weeks, there has been a lot of news about the crypto industry in South Korea. Indeed, South Korea’s stance on cryptocurrencies quickly evolves in line with the country’s increasing adoption. As reported by the media outlet Chosun, more and more young Koreans are turning to crypto trading to make earnings. This interest from young Korean coupled with clearly established crypto regulations makes South Korea an important country for crypto adoption.

State of crypto regulation in South Korea

As we covered before, South Korea recently implemented a new regulation focused on cryptocurrencies which entered into force on March 25, 2021. The new laws set several AML/CTF requirements on VASPs established in the country such as customer due diligence or reporting requirements.

While this law is aimed at making the crypto industry safer in the country, it could be tricky for all Korean exchanges to comply with the requirements such as implementing real-name verification with banks. Indeed, smaller exchanges could have a hard time finding a bank willing to partner with them for example. Nevertheless, all VASPs have until mid-September to be fully compliant with this regulation.

However, in April, the head of the FSC said that the regulatory authority hasn’t received applications for registration from VASPs yet and that this could lead to shutdowns if the situation fails to change by the September deadline.

In late May, the Korean government issued a joint statement clarifying the role of government authorities in the overview of cryptocurrency and VASP regulations according to a report. The roles are distributed as follows:

  • The Financial Services Commission (FSC) will monitor VASPs, manage crypto regulation and ensure that crypto businesses comply with AML requirements;
  • The Finance Ministry, the Fair Trade Commission, the National Tax Services, and Korea Customs Service are also tasked with crypto regulation and supervision;
  • The Korean Financial Intelligence Unit manages crypto businesses registrations;
  • The Science Ministry will promote blockchain and fight hacking incidents;
  • The Korean Police will deal with crypto-related crimes.

Besides according to the Korea Herald, the Central Bank of Korea (BOK) also plans to use its authority to monitor crypto transactions made with bank accounts through the real-name verification partnerships that VASPs must implement with banks.

Korea’s Central Bank Digital Currency in the making

Korea’s BOK has been keen on setting up its own central bank digital currency (CBDC) as other countries are preparing CBDC pilot tests worldwide. In February 2021, BOK issued a study stating that CBDC will be considered as fiat and will have a legal tender unlike private cryptocurrencies such as Bitcoin.

A month later, in March, the BOK developed its stance on CBDCs explaining that it believes the issuance of a national CBDC would decrease the demand for other cryptocurrencies like Bitcoin. 

The pilot test in South Korea should begin in the second half of 2021 and will focus on fund transfer, payment,  issuance, distribution, redemption.

Crackdown on illegal activity 

According to recent announcements, it seems that the country wants to focus on preventing cryptocurrency-related scams and money laundering (ML).

In April 2020, the Office for Government Policy Coordination (OPC) issued a press release informing of a crackdown on illegal activity using cryptocurrencies from April to June notably through intensive analysis of suspicious crypto transactions. This crackdown is aimed at preventing ML through cryptos that increased recently because of the overall increase in crypto prices.

In the same manner, Yonhap reported on May 9 that South Korea would be collaborating with the national law enforcement agency to fight against phishing scams related to cryptocurrencies amid increasing reports of such scams targeting crypto users in the country. Indeed the ICT ministry claimed it has unveiled 32 phishing sites in the past 3 months while 42 were discovered in total in 2020.

South Korea crypto taxation

Last year, the country proposed a new tax code concerning crypto that was set to come into force in October 2021 but was delayed to January 2022 instead. From this date, crypto trading earnings will be subject to a 20% tax if profits exceed 2.5 million South Korean Won (around $2,200) according to an amendment issued in January this year.

In April, the city of Seoul announced having seized the equivalent 25 billion won (around $25 million dollars) in cryptocurrencies from tax dodgers that were hiding their assets with crypto held in exchanges as reported by Yonhap.

Update on June 18, 2021

South Korea continues to tighten regulations concerning cryptocurrencies with several new rules to comply with.

As reported by the Korea Times, the FSC issued guidelines on June 14, requiring banks to classify their crypto exchange customers as high risk and conduct strengthened transaction monitoring and ID verification on them to ensure better consumer protection. Last week, South Korea’s FSC warned 33 crypto trading platforms that it would conduct field consultations before the deadline of September 24.

According to the Korean Herald, the strengthening regulation pushes Korean exchanges to delist specific digital assets. One of the largest exchanges in the country, UpBit, issued a warning on 25 digital assets and plans to delist 5 digital assets. According to Arirang, 11 out of the 20 exchanges that received the Information Security Management System certificate which is needed to comply with the upcoming regulation, either delisted digital assets or issued warning notices on digital assets.

Arirang also reported a new FSC-issued rule prohibiting crypto exchanges to handle cryptocurrencies issued by themselves or by persons related to them (spouses and distant relatives included). This new rule comes into effect on June 26.

There have been a lot of developments around cryptocurrencies in the last few months in Korea. The next major milestones are the implementation of the new AML/CTF regulation in September 2021 and the new tax code coming into force in January 2022. Just like in South Korea, crypto regulation is evolving fast around the world and more governments expect VASPs to comply with new requirements.

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