South Korea does not consider cryptocurrencies legal. While exchanges are deemed legal, they still need to obey a set of strict regulations. Since transactions in crypto cannot be viewed either as cash or financial assets, they are not taxed which makes crypto taxing a grey area in South Korea. Nevertheless, the local government has stated its intention of levying taxes on cryptocurrencies in the nearest future and plans to issue the framework in 2022.
The regulation of crypto exchanges in South Korea can be judged as quite harsh considering the mandatory government registration and other rules dictated by the Financial Supervisory Service of South Korea (FSS). In 2017, the local government forbade financial institutions in South Korea to host Bitcoin futures transactions and restricted the use of all anonymous crypto accounts. Moreover, the reporting requirements for banks with crypto exchanges became stricter in 2018.
According to the new laws, a trader must create a real-name account with the same bank as their cryptocurrency dealer. In other words, cryptocurrency trading is restricted to “real-name bank accounts” and this is the only way to use e-wallets. Also, there are AML/CFT rules that oblige the bank and the dealer to authorize the trader’s identity.
This new legislation was published in 2020. It extended the AML/CFT conditions that cryptocurrency exchanges in South Korea must comply with. In addition, it orders all South Korean exchanges and requiring companies to gain an operational license from the Financial Intelligence Unit which is part of the Financial Services Commission by the end of September 2021.
Who do the regulations apply to?
The new regulations in South Korea apply to Virtual Asset Service Providers (VASPs) who perform these activities:
- Administrating or keeping virtual assets
- Transmitting cryptocurrencies
- Trading cryptocurrencies
- Performing crypto-to-crypto transfers.
These operations include cryptocurrency exchanges, Initial Coin Offering (ICO) projects, and custodian wallet providers.
The key novelties
So what are the changes for all crypto service providers in South Korea? After the implementation of the new legislation, they all are obliged to register with the local financial regulators and upgrade their AML/CFT systems. Even though these conditions are not completely new as they were published in 2018, it is only recently that they became mandatory.
From now on all VASPs are required to:
- Open a corporate bank account and offer real-name accounts with the same institution
- Put in place enhanced AML/KYC processes
- Obtain a certificate of an Information Security Management System from the Korea Internet and Security Agency
- Give the company’s data including the bank account information to the financial intelligence unit.
The transition period is still ongoing and will end in September 2021. The punishment for not having an approved bank account can be extremely strict and include prison detention or fines up to 43,000 USD.
Are you planning to enter the South Korean market as a crypto exchange? COREDO is here to help with complying to all necessary requirements or applying for a license.