South Korea officially passes the Special Financial Law Amendment! Another step forward in the institutionalization of cryptocurrency

Source: Scallion Blockchain

Yesterday, the news that the Indian Supreme Court overturned the Indian central bank's crypto ban caused some excitement in the crypto community.

This afternoon, the plenary session of the National Assembly of South Korea also formally passed the amendment to the Act on Reporting and Utilization of Specific Financial Transaction Information (hereinafter referred to as the Special Financial Act). This means that the amendment will be implemented one year later (i.e. in March 2021). Relevant companies must report to the financial sector within six months from the date of implementation.

The amendment considers domestic cryptocurrency exchanges in South Korea as “financial companies” and includes regulations on anti-money laundering and cryptocurrency financing.

In addition, the Financial Information Analysis Unit (FIU) of the Financial Services Commission of South Korea will formulate a series of measures such as subordinate regulations to smoothly implement the amendment. Relevant departments will also actively collect opinions from the crypto industry and private experts.

What are the main contents of the Special Financial Law Amendment Bill?

The amendment complies with some of the implementation standards recommended by the Financial Action Task Force (FATF). The specific contents of the bill are as follows:

1. Define cryptocurrency-related companies as “Virtual Asset Service Providers (VASPs)”.

2. Digital asset operators must comply with operator duties, such as reporting to the Financial Information Analysis Unit (FIU) of the Financial Services Commission of Korea, anti-money laundering obligations (customer confirmation and suspicious transaction reporting, etc.) and additional obligations. Specifically, unreported operating companies will be sentenced to a prison term of up to 5 years and a fine of up to 50 million won. This actually means that the government will directly manage the cryptocurrency market within the scope of the law.

3. Financial companies that trade with digital asset operators must comply with the following obligations: check the operator’s representative and transaction purpose, check whether the operator has submitted a declaration, and whether the funds are managed separately.

In fact, the Financial Services Commission of South Korea has previously expressed its willingness to manage the virtual asset trading market by reviewing the scope of business of virtual asset operators, the operating methods of the reporting system, and the operating conditions of real-name accounts. Exchanges that do not meet the standards set by regulators are more likely to be forced to exit the market.

How has the crypto community reacted?

The crypto community generally welcomes the institutionalization of cryptocurrencies. Previously, most domestic cryptocurrency exchanges in South Korea called for the rapid passage of the amendment to South Korea's special financial law.

A South Korean exchange manager said that some illegal companies have caused direct and indirect damage to exchanges that abide by industry rules and have had a negative impact on the industry. The crypto industry is in urgent need of regulation.

Some practitioners also emphasized that since some major countries in the world have already established regulations related to cryptocurrencies, South Korea urgently needs to keep up with the pace and ensure global competitiveness.

However, a South Korean legal expert pointed out that after the passage of the Special Financial Law Amendment, only large exchanges with financial strength such as Bithumb and Upbit will survive, while other small and medium-sized trading sites will have to exit the market. In addition, the Special Financial Law Amendment, which includes content such as real-name account authentication, may be a fatal blow to the crypto industry.

The industry expects that the discussion on cryptocurrency tax classification will become more active after the National Tax Service of South Korea levied "taxes totaling more than 80 billion won (including local taxes) related to withholding taxes on foreign customers" from Bithumb.

On the other hand, the Financial Services Commission of South Korea is expected to actively formulate guidelines for cryptocurrency trading businesses based on the amendments to the Special Financial Act.

The process of cryptocurrency institutionalization in South Korea

Xiaocong organized the institutionalization process of cryptocurrency in South Korea according to a timeline.

In November 2016, a digital currency working group was established.

In December 2016, Shinhan Bank opened a Bitcoin remittance channel between China and South Korea.

In June 2017, the South Korean government held a Bitcoin auction.

In July 2017, representatives of the Democratic Party of South Korea drafted a revised bill to regulate and legalize cryptocurrencies.

Effective July 18, 2017, a revised version of South Korea’s Foreign Exchange Transactions Act allows fintech companies to register with the Financial Supervisory Service (FSS) to “provide international currency transfer services for small amounts of funds,” including Bitcoin.

In early September 2017, South Korea’s Ministry of Science and Technology and Communications Commission announced that they would conduct on-site inspections of cryptocurrency service providers such as Bitcoin exchanges.

In September 2017, South Korea planned to punish ICO projects.

At the end of September 2017, South Korea’s Financial Services Commission (FSC) stated that it would ban all forms of initial coin offerings (ICOs).

In October 2017, the Governor of the Bank of South Korea stated that Bitcoin is a commodity rather than a currency.

In December 2017, South Korea banned financial institutions from participating in cryptocurrency activities.

In December 2017, the South Korean government cracked down on fraudulent exchanges.

In December 2017, the South Korean government announced that it would take more measures to regulate cryptocurrencies, including real-name registration for cryptocurrency transactions, prohibiting anonymous opening of cryptocurrency accounts, and closing virtual currency exchanges.

On December 24, 2017, the South Korean government's policy coordination office will ban the use of anonymous accounts for cryptocurrency transactions and prohibit banks from providing settlement services for unidentified cryptocurrency transactions. The newly proposed legislation will be implemented in January 2018.

In January 2018, traders who fail to undergo real-name verification will face fines.

In January 2018, South Korea’s Ministry of Defense banned the military from trading cryptocurrencies.

In January 2018, 25 South Korean exchanges participated in the cryptocurrency self-regulatory initiative.

On January 21, 2018, South Korea plans to require banks to have information on all virtual currency transactions.

January 22, 2018, Yonhap News Agency: South Korea will impose a 24.2% corporate and local income tax on South Korean virtual currency exchanges, which will be implemented in 2018.

On January 30, 2018, South Korea began to implement the real-name system for virtual currency transactions. New accounts opened at six banks that trade with virtual currency exchanges, including Shinhan Bank, Nonghyup Bank, Enterprise Bank, Kookmin Bank, Hana Bank, and Gwangju Bank, are required to confirm their real names.

On January 31, 2018, the Korea Customs and Taxation Service: will begin to focus on cracking down on unregistered foreign exchange businesses using virtual currencies.

On February 1, 2018, South Korean Finance Minister Kim Dong-yeon stated that the government is always paying attention to the use of digital cryptocurrencies for illegal overseas transactions and will formalize the management of digital currency transactions.

On March 23, 2018, South Korea’s Financial Services Commission (FSC) is considering lifting the ICO ban.

From April 19 to 25, 2018, the Financial Intelligence Analysis Unit (FIU) of the Financial Services Agency of South Korea and the Financial Supervisory Service will conduct on-site inspections of three banks (NH Bank, KB Bank, and KEB Bank) that provide virtual accounts to digital currency exchanges. The inspection content is whether they comply with the "Guidelines for Anti-Money Laundering Related to Digital Currency".

April 30, 2018, Bank of Korea: South Korea’s financial sector is preparing digital currency tax standards.

On May 6, 2018, the head of South Korea’s new Financial Supervisory Service confirmed the relaxation of regulation on digital currency transactions.

In May 2018, the South Korean National Assembly proposed allowing domestic ICOs.

On July 20, 2018, the taxation of virtual currency exchanges was not included in the tax reduction plan of the 2018 tax law amendment in South Korea.

August 1, 2018, South Korean Parliament: It is necessary to review the issue of imposing local taxes on virtual currencies, etc.

On August 14, 2018, the South Korean government announced that it would remove digital currency-related businesses and blockchain projects from the tax reduction bill.

On October 14, 2018, Choi Jong-ku, Chairman of the Financial Services Commission (FSC) of South Korea, reiterated his negative stance on virtual currencies and ICOs at a meeting.

On October 24, 2018, the Financial Supervisory Service (FSS) and the Financial Services Commission (FSC) of South Korea issued a statement stating that digital currency funds are not legal fund products, have not been registered with the Financial Supervisory Service, and have also violated the "Law on Capital Markets and Financial Investment Industries" (hereinafter referred to as the "Capital Market Law"), reminding investors to pay attention to risks.

At the end of November 2018, the South Korean government listed virtual currency as one of the nine major money laundering risk factors.

On December 2, 2018, South Korea’s new Finance Minister Hong Nam-ki revealed that South Korea intends to impose taxes on cryptocurrencies and ICOs.

In January 2019, the Financial Supervisory Service (FSS) of South Korea released the results of its investigation into ICOs. The FSS investigated 24 ICO projects in South Korea (two of which were interrupted) during the three-month period from September to November 2018. The South Korean government believes that the ICO ban should continue to be maintained in order to protect investors and prevent speculation from happening again.

On March 28, 2019, lawmakers from the Democratic Party of South Korea submitted a bill proposing to punish unlicensed cryptocurrency exchanges.

On May 28, 2019, the South Korean government stated: We are closely monitoring the trends in the virtual currency market and advise investors to invest in virtual currencies with caution.

At the end of September 2019, the Chairman of the Fourth Industrial Revolution Committee directly under the South Korean President: He will propose to the government to institutionalize crypto assets.

On October 25, 2019, South Korea's Fourth Industrial Revolution Committee urged the government to institutionalize cryptocurrencies and formulate relevant tax schemes as soon as possible.

On November 21, 2019, the Legal Review Subcommittee of the Political Affairs Committee of the National Assembly of South Korea passed the Special Financial Law Amendment Bill.

On November 25, 2019, South Korea’s special financial law amendment on virtual assets was approved by the Cabinet Committee and still needs to be approved by the Judiciary Committee and the plenary session of the National Assembly.

A shareholder of Bithumb Holdings, the operator of Bithumb Korea, said on December 27, 2019 that the National Tax Service imposed “taxes totaling more than 80 billion won (including local taxes) related to withholding taxes on foreign customers” on Bithumb Korea.

On December 30, 2019, the Ministry of Strategy and Finance of South Korea stated that cryptocurrencies are not included in the taxable items in the current tax law, but it is planned to impose taxes on them by revising the tax law.

In January 2020, a committee of the South Korean presidential office recommended allowing financial institutions to launch cryptocurrency-related products such as Bitcoin derivatives.

In mid-January 2020, Bithumb filed a lawsuit with the Tax Court, accusing the National Tax Service of South Korea of ​​"unfounded" taxation.

January 20, 2020, people familiar with the matter: South Korea’s Ministry of Finance is considering imposing a 20% tax on cryptocurrency trading income.

On February 20, 2020, Upbit officially announced that it is unable to resume withdrawal services for foreign users due to the inability to independently determine the tax standards and rates.

On March 4, 2020, the South Korean National Assembly's Rule of Law and Judiciary Committee passed the revised bill on the Act on Reporting and Utilization of Specific Financial Transaction Information (Special Financial Act). The only thing left is the voting procedure of the plenary session of the National Assembly.

On March 5, 2020, the plenary session of the South Korean National Assembly formally passed the amendment to the Special Financial Act.

Reference articles:

https://www.news1.kr/articles/?3863151

https://m.leiphone.com/news/201802/91puS882GYs0KyQf.html