With the new regulations coming, small crypto exchanges in South Korea may face a "wave of closure"

This article is from The Korea Herald, original author: Park Ga-young

Odaily Planet Daily Translator | Nian Yin Sitang

South Korea's local cryptocurrency exchange Daybit said on Sunday that it will voluntarily shut down its business due to tightening anti-money laundering laws. Chain Partners, which operates Daybit, said the platform plans to shut down by June 1 due to regulatory factors. Earlier this year, CPDAX, operated by blockchain technology developer Coinplug, also decided to shut down.

Daybit said: "After the Act on Reporting and Using Specified Financial Transaction Information recently came into effect, we are unable to provide normal trading services due to the stricter regulatory environment, so Daybit will cease operations in stages by June 1." Daybit's contract with Shinhan Bank will expire before June.

Industry experts say many other local exchanges face similar hurdles in meeting new regulatory requirements and may decide to follow Daybit’s lead.

“There are more than 10 exchanges that have completed the (Information Security Management System) requirement, which is one of the requirements for exchanges that want to register with the Korea Financial Intelligence Unit (KoFIU), but they are having difficulty getting real-name accounts from local banks,” said the source, who declined to be named. “It is likely that more exchanges will close among the more than 100 exchanges in South Korea.”

The regulatory wave is coming

According to the Financial Services Commission (FSC), the amendment to the Act on Reporting and Using Specified Financial Transaction Information requires all businesses engaged in virtual asset exchange, storage and management to report their operations to the Korea Financial Intelligence Service. The amendment will take effect on March 25, giving exchanges a six-month grace period.

In order to report to the KoFIU, local exchanges must find banks willing to issue real-name accounts for their virtual asset customers. Exchanges that fail to do this will eventually have to shut down, as investors using non-KoFIU registered exchanges are prohibited from transacting with financial companies and banks. This prevents users from transferring funds from personal bank accounts to exchanges and vice versa, thereby preventing the purchase and withdrawal of cryptocurrencies.

The four largest cryptocurrency exchanges in South Korea, Bithumb, Coinone, Upbit and Korbit, have successfully worked with banks, but about 100 smaller exchanges are still struggling. These unregistered exchanges only lasted five months before they were forced to shut down. Since banks have the responsibility to screen various exchanges, they are reluctant to take risks and issue real-name cryptocurrency trading accounts.

The South Korean government also announced on April 18 that it plans to crack down on any illegal activities involving cryptocurrencies, including money laundering and fraud, putting more pressure on banks. The government is currently negotiating plans to regulate overseas remittances and banks with ties to crypto exchanges due to concerns that funds are flowing out of the country in the form of purchasing crypto assets. Local media reports claim that some South Korean investors appear to be trying to take advantage of the "Kimchi premium" by transferring fiat currency overseas to buy cryptocurrencies from over-the-counter sellers in other countries. These traders then sell the tokens on the domestic market.

Media reports say the Financial Supervisory Service, which regulates the currency, is currently reviewing a plan to develop guidelines for overseas remittances involving crypto assets and is consulting with several government ministries, including the Ministry of Economy and Finance. The regulator has also convened the heads of foreign exchange departments at commercial banks in an effort to reach a consensus on the guidelines. Under the guidelines, banks may work with regulators as they do on anti-money laundering (AML) issues. Banks will be told to flag or suspend overseas remittance requests they deem suspicious. These could include sudden requests from customers with no history of overseas remittances to send large sums overseas, or to send money to non-Koreans overseas for unknown reasons. However, many banks have said they are in a state of "confusion" about their responsibilities related to cryptocurrencies. Commercial banks say they are concerned that this means that in the event of a violation of AML regulations, the responsibility will ultimately fall on the banks.

At the same time, the Korea Customs Service has also begun to regulate illegal transactions using crypto assets to deal with the "Kimchi Premium". "Cryptocurrencies can be used for financial trade crimes, and if the Korea Customs Service detects this trend and grasps suspicious circumstances, it will start an investigation," a Korea Customs Service official said on April 21. The Korea Customs Service has strengthened its supervision of cryptocurrency transactions. The Korea Customs Service official explained: "We plan to regard illegal cryptocurrency transactions as an extension of the supervision of trade financial crimes and illegal foreign exchange transactions."

While the South Korean government is focusing on cracking down on illegal activities related to crypto assets, the Financial Supervisory Service has issued a "restriction order" requiring internal employees to prohibit investment in cryptocurrencies. The Financial Supervisory Service emphasized on the 22nd that all executives and employees in related work cannot provide information about crypto assets to others, nor can they assist in trading or investing in assets. The relevant staff include departments responsible for handling virtual asset policies and laws or responsible for virtual asset investigations and inspections.

Banks may lose more than they gain

Banks have been complaining about what they see as extra burdens and a lack of government guidelines. To make matters worse, recent market volatility and skeptical comments from senior financial officials have made it harder for local banks to associate with cryptocurrency trading businesses.

“Working with crypto exchanges might have looked like good business when the crypto market was bullish, but currently, especially when the market is as volatile as it has been recently, the risks appear to outweigh the small transaction fees that banks could earn from the collaboration,” a bank official said.

Bithumb market data shows that the price of Bitcoin has plummeted from its all-time high of 82 million won (about 73,500 US dollars) on April 14 to the current price of about 60.8 million won (about 54,500 US dollars).