For those who may not know, cryptocurrencies/virtual assets (the best known of them, at the moment, is Bitcoin), are digital representations of value that can be digitally traded or transferred. When holders are using these currencies the transaction, in short, the use is via Blockchains (in short, a decentralized databases).
South Korea has been at the forefront of the global cryptocurrency boom and its spread has permeated through all levels of society. Statistics from 2017 show that more than one third of employees in Korea were active investors in various cryptocurrencies. The Seoul City government even launched their own currency called “S-coin” in November of 2019.
However, despite all the hype surrounding cryptocurrencies in Korea, the market was almost completely unregulated leaving open the possibility for unchecked money laundering, the purchase of illegal goods and frauds. perpetrated on the population.
That all changed on March 6, 2020 when the Korean National Assembly passed the amended version of the “Act on Reporting & Use of Specific Financial Information.”
This article shall, briefly, detail why and how the amendment was passed as well as some of the key implications of the new Korean Cryptocurrency Law.
Background to Korea’s Cryptocurrency Law
G20 nations have long discussed the need to cooperate in a global effort to regulate cryptocurrency. In the summer of 2019 an international watchdog for international money laundering and terrorist financing, the Financial Action Task Force (FATF), put out a call to member countries to establish legislation to assist in fighting the proliferation of illicit activities through virtual asset transactions.
In response, a number of different bills in Korea were introduced to amend the already existing “Act on Reporting and Use of Specific Financial Information.” The version that ultimately passed made its way out of the Korean National Assembly’s subcommittee review phase in November of 2019, was passed unanimously on March 6, 2020 and will go into force after a one year grace period. The amendment applies to any financial transaction of virtual asset businesses that occurs overseas and/or has any overlap/access to Korean consumers.
Defining a Virtual Asset/Virtual Asset Business under Korean Law
One of the first things the amendment does is set a clear standard for what a virtual asset is and who qualifies as a virtual asset business. The amendment defines a virtual asset as “an electronic certificate with economic value (including any and all relevant rights) that may be traded or transferred electronically.” Similarly, a virtual asset business is any person or entity engaged in any of the following activities:
- Sale and purchase of virtual assets;
- Exchange between virtual assets;
- Transfer, safekeeping, and management of virtual assets; or
- Agency, brokerage or intermediary services of any of the above mentioned transactions.
Obligation to Verify and/or Terminate Transactions with Virtual Asset Businesses/Customers
One of the most prominent changes to the amendment is that financial companies and other related entities are now required to corroborate customers and, when such verification is unavailable, deny or cancel transactions. For cryptocurrency customers, the following must all be confirmed by businesses in order to approve a transaction:
- Filing of the report under Article 7, acceptance of such a filing, and cancellation of such a report;
- Separate management of the deposited property of its customers and the property of the virtual asset businesses; and
- Certification of information security management system (“ISMS”) under the Act on Promotion of Information and Communications Network Utilization and Information Protection, Etc. (Article 5-2(1)3).
The aforementioned law mandates that businesses are required to report all customer transaction details upwards to the Commissioner of the Korea Financial Intelligence Unit (KFIU). Such details include: (i) trade name; (ii) representative’s name; (iii) place of business; (iv) contact information; and (v) any adjustments to the aforementioned data.
KFIU/Criminal Punishments of Bad Actors under Korean Law
The KFIU has the right to refuse or cancel a business filing if the above requirements are not followed. In circumstances of gross negligence or money laundering/terrorism financing, the KFIU can suspend a virtual asset business for up to six months and for certain intentional acts criminal charges may be filed.
Additionally, the amendment enables any virtual asset business that fails to file the required report to face imprisonment of up to five years or penalties of five million KRW.
Similarly, businesses that fail to file reports of modification can face up to three years in prison or a criminal fine of up to three million KRW.
Implications of the Amendment
The KFIU’s new role as a watchdog in addition to the reporting requirements for virtual asset customers and businesses creates a regulatory framework whose stability will likely attract other international players to the Korea’s virtual asset industry.
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