South Korea is one of the most crypto-friendly countries in Asia - perhaps the world. But the government is tightening identity verification requirements for asset managers, and exchanges are following suit.
Several exchanges plan to implement stricter ID verification measures in 2022.
Coinone Sets the Ball Rolling
On December 28, Coinone - one of South Korea's biggest exchanges - announced it would no longer allow customers to withdraw tokens to unverified external wallets.
In a statement, the exchange said users have a grace period from December 30 to January 23 to register any external wallets they have with the exchange. From then on, all withdrawals to external wallets will be blocked.
Coinone pointed out that users would only be able to register their own wallets, adding that the verification process could take some time.
The exchange also pointed out it plans to verify users' resident registration numbers and names to ensure all transactions on the platform are legitimate and legal. Customers also may be unable to withdraw to wallets without proper anti-money laundering (AML) and know-your-customer measures.
Deadlines Loom on All Corners
Coinone's action follows the passage of a bill by the South Korean National Assembly. The bill, to be implemented in March 2022, places stringent reporting requirements on exchanges and the use of certain financial information.
Amongst other things, the bill introduces a permit system for exchanges in South Korea. All exchanges must report their information to the Financial Intelligence Unit (FIU) - the data and compliance arm of the Financial Services Commission (FSC). Exchanges that fail to meet requirements could face various penalties, including jail time for top officials and up to 50 million won (about $45,000) in fines.
As of September 2021, exchanges in the country have been required to implement Internet Security Management System (ISMS) verification and limit partnerships with just one bank. Bank partners issue real-name accounts to customers, ensuring easy tracking of fund movement.
The South Korean bill is part of the country's efforts to comply with the Travel Rule from the Financial Action Task Force (FATF). A report from compliance service Sygna explains that the Travel Rule compels all national governments to ensure their domestic crypto exchanges share real identity information with local regulators. Failure to comply comes with fines and sanctions.
It's worth noting that the move will make South Korea a bit of an outlier in the global crypto industry. Many other top economies have signaled that they will comply with the FATF's Travel Rule, though none currently requires exchanges to offer information about customers' private wallets.
A Lot to Come from South Korea Thie Year
With the bill's deadline looming, other exchanges are lining up behind Coinone to impose new identity verification requirements on users. Several of the country's top exchanges - including Upbit, Bithumb, and more - are expected to place their users under these new restrictions to ensure compliance with government demands.
This isn't to say some exchanges haven't bucked the trend. Bybit, one of South Korea's largest crypto derivatives exchanges, announced in September it would cease some of its services to the country.
In its September 17 announcement, ByBit claimed it would halt all Korean language support from its platforms and discontinue engagements with the South Korean community across its social media platforms. While Korean traders can still use its products and services, support will be little to none.
Bybit explained that the looming ISMS deadline forced it to take action. The company tried to negotiate terms with regulators, but all talks fell through.
While Bybit is comfortable cutting off support to Korean users, several other exchanges in the country aren't. The Korean market is too important, and compliance with regulations is a prudent move.
Things could get even more interesting for South Korea's crypto space. The government is also looking to regulate non-fungible tokens (NFTs), exposing marketplaces and exchanges to their own set of stringent rules.