The amendment to the Special Financial Reporting Act, which regulates the cryptocurrency exchange information system, passed the plenary session on the 5th National Assembly. This means the full legalizations of cryptocurrencies in South Korea. However, a restructuring of the blockchain industry is expected due to the large number of small and medium-sized exchanges that do not meet the reporting requirements.
The National Assembly held a plenary session this afternoon and decided to revise the special law that passed the judiciary committee the day before according to Coindesk Korea. It has been two years since Representative Je Yun-kyung and the Democratic Party’s representatives were launched in March 2018 under the Financial Services Commission’s legislation.
Anti-money laundering obligations to exchanges
The revised special law is mainly to grant anti-money laundering (AML) and terrorist financing (CFT) obligations to virtual asset providers (VASPs) such as cryptocurrency exchanges.
Under the Special Act, a virtual asset business operator must report to the Financial Services Bureau of Financial Information Analysis (FIU) with a verified real name, assigned to a single bank account that can be used for deposits and withdrawals to the crypto exchange. Also, the operator should obtain the Information Security Management System (ISMS) certification.
The guidelines introduced by the FTC in 2018, forces exchanges and their users to use the same bank when depositing and withdrawing money into cryptocurrency exchanges. Currently, only four major exchanges (Upbit, Bithumb, Coin-One, Cobit) have signed this service agreement with banks.
The ISMS certification is a system that the Korea Internet Security Agency (KISA) certifies that a company can secure key information assets. Depending on the size of the exchange, certification is expected to cost several hundred million units and take more than six months. Now, all exchanges have 6 months to comply with the new regulation or risk to be shut down.
Blockchain Industry Restructuring
The amendment to the Special Reporting Law means that the cryptocurrency will be fully legal in South Korea. The cryptocurrency industry, which was in the gray zone, was first regulated by law. In the meantime, there were no regulations so anyone could make a cryptocurrency exchange business as if they were creating an Internet homepage. As a result, the market has been mass-producing victims due to constant market-related events such as price manipulation, insider trading, and so-called pump and dump schemes.
Revision of the Special Act will reduce investors’ damage through market consolidation, but at the same time, the restructuring of the blockchain industry is expected to proceed. If the bank does not add a ‘real name withdraw and deposit account service’ contract as the Financial Services Commission notices, the domestic crypto market may have only four major exchanges. An ISMS certification and an IT system for future tax filing are also possible only with exchanges with sufficient capital.
The amendment, which passed the plenary session of the National Assembly, shall be promulgated by the President within 15 days of being transferred to the government. The amendment shall take effect one year after the date of promulgation. Existing virtual asset operators operating must report within six months of implementation. Existing cryptocurrency exchanges should have a ‘real name verification deposit and withdrawal account service’ and ISMS certification until about September 2021.