South Korea is one of the largest economies in the Asian region. The country has also managed to stay politically stable and expand its financial reach to become one of the richest in the world.
However, while cryptocurrency operations have ideally been allowed to move without any problems in the country, its government - and financial regulator - is now looking to clamp down on the market.
Getting Everyone to Register
South Korea’s action against exchanges began the same way that many countries’ issues do - action against unregistered exchanged. In July, the Financial Services Commission (FSC) announced that it would take action against cryptocurrency exchanges that fail to register with it by September 24.
As the announcement confirmed, the regulations would affect exchanges based in South Korea and foreign exchanges that operate in the country. It even affects exchanges where the Korean language is supported or if marketing is targeted towards the country’s citizens.
As part of the Specific Financial Information Act, the punishment for exchanges that keep operating without registering will be up to five years in prison for top officials and up to 50 million won - about $44,000 in fines.
Following the news, rumors started to swirl. The Korea Herald reported in August that the FSC was looking to shut down 11 local crypto exchanges, citing anonymous sources. However, a spokesperson for the agency confirmed that there were no such plans in place. The representative added that the 11 exchanges in question can keep their operations running once they abide by its regulations. Barring that, they would be banned.
Information Oversight and Taxation
Still, the ax continued to fall. For instance, the new Korean crypto regulatory guide asserts that the FSC will now subject local exchanges to the Act on Reporting and Using Specified Financial Transaction Information - itself a subset of the Travel Rule from the Financial Action Task Force (FATF).
Upon registration, cryptocurrency exchanges will be subject to anti-money laundering (AML) obligations. These include verifying customers’ identities and filing reports when any suspicious activity is noticed. Exchanges will also be subject to inspections from financial authorities, which will supervise their compliance with AML obligations as soon as they register.
Interestingly, the AML requirements will also extend to offshore cryptocurrency exchanges and other virtual asset service providers. As long as they have domestic subsidiaries or business operations, they will have to abide by the FSC’s rules.
Accordingly, the Korea Financial Intelligence Unit (KoFIU) has sent out notices to 27 offshore virtual asset service providers, whose business operations “target users in Korea” and asking them to register with the Korean government by September 24. As expected, exchanges that target Koreans, offer Korean support, or use the Korean won for payments will be made to oblige to this law.
The crackdown is also extending to taxation. Korea’s finance ministry has begun a campaign to impose a controversial tax on crypto companies by 2022, and although it is facing the threat of postponing the law for a year, it remains adamant in its mission.
The controversial tax code will look to levy a 20 percent tax on income generated by crypto transactions, as long as they exceed 2.5 million Korean won - about $2,100. It has already been significantly condemned by many in the industry, but the finance ministry is still looking to get it imposed.
Companies Already Pulling Out
With the current regulatory landscape, it is no surprise that companies are now leaving South Korea.
In July, local crypto exchange Bitsonic announced on its Telegram channel that it would temporarily stop operating. The company had cited “internal and external issues,” while CPDAX- another crypto trading platform - had announced that it would close its operations entirely on September 1.
The biggest closures so far have occurred in September, however. Bybit, one of the world’s largest crypto derivatives trading platforms, has announced that it would close some of its services to the country ahead of the September 24 deadline.
As the exchange announced, support for the Korean language will stop on its platform. The company will also cease support for its official South Korean community on social media.
"Korean traders may still use Bybit products and services. These products and services just won't be offered in the Korean language any more," a spokesperson for the exchange said told Cointelegraph. "We had conversations with Korean regulators on that. We were told that licenses would only be given to local entities, and our setup precluded that."
Also, Gopax, a local crypto exchange that was backed by the Digital Currency Group, has said that it might close down as it is unable to find a banking partner. To be eligible for licenses, exchanges will need to show evidence that they operate using real-name accounts with local banks. But, domestic banks have so far refused to engage in risk assessment for several exchanges - including Gopax.
In a notice, Gopax said that it is negotiating with a financial institution to establish an account for processing deposits and withdrawals. Up until the deadline, it will continue operating its crypto trading service for the Korean won. But, if its negotiations don’t yield any results. The company will have to end support for all won transactions.