State of Regulation in South Korea: Banks Required to Provide Fair Services to Crypto Exchanges
On October 30, South Korea’s main financial authority officially cleared banks to work with crypto exchanges for the first time in history, establishing a major milestone for the local cryptocurrency sector.
At the state affairs audit, held by both government parties of South Korea to evaluate and track the progress of every government branch and agency under the administration of President Moon Jae-in, Financial Services Commission (FSC) commissioner, Choi Jong-ku, stated that the FSC has cleared banks to work with cryptocurrency exchanges by providing virtual bank accounts.
On the digital asset trading platforms of South Korea, every bank account holder is provided with a virtual bank account by the account issuer, in this case a local bank, to provide an instantaneous and efficient system to withdraw and deposit funds.
Cryptocurrency investors in South Korea are not required to wait one to five days for deposits and withdrawals to clear, as they can safely store the South Korean won on exchanges by leveraging the security of local banks.
Commissioner Choi stated that banks and financial institutions are authorized to provide virtual bank accounts to cryptocurrency exchanges, given that the exchanges have strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems in place that do not allow anonymous accounts and users to trade digital assets.
“There exists no issue in banks providing virtual bank accounts to cryptocurrency exchanges. If digital asset trading platforms have KYC and AML systems in place, there is no problem in issuing virtual bank accounts to exchanges.”
The approval of banks by the FSC, to open virtual accounts for cryptocurrency investors, is not equivalent to the approval of anonymous accounts. Virtual bank accounts in South Korea refer to replica accounts of bank holders, provided to third party platforms like cryptocurrency exchanges to allow instantaneous deposits and withdrawals.
Major milestone for South Korea and local exchanges
Throughout the past five years, despite the increase in demand for cryptocurrencies and blockchain technology, the government of South Korea has been skeptical towards regulating the asset class and the market because it feared that the implementation of a regulatory framework would come across as an endorsement of the asset class to the public.
However, the abrupt increase in the valuation of the cryptocurrency market in late 2017, which saw the price of Bitcoin skyrocket from $5,000 to $20,000, and briefly reach $25,000 in South Korea due to the so-called “Kimchi Premium” that refers to premium rates on major cryptocurrencies, encouraged the government to strictly regulate the market and demand local cryptocurrency exchanges to enable investor protection.
In June, Kim Yong-bum, the vice chairman of the FSC, officially declared that the Kimchi Premium in the cryptocurrency exchange market of South Korea has dematerialized, eliminating the possibility of investors overseas, to take advantage of the premium and arbitrage.
“The government’s practical policies led the ‘Kimchi Premium’ to disappear in South Korea. At its peak, the ‘Kimchi Premium’ in the local cryptocurrency exchange market reached 50 percent, due to unusual spike in demand and speculation. As of current, the price of cryptocurrencies is nearly identical to other markets, demonstrating stability in the South Korean cryptocurrency market.”
At the time, the FSC had taken its first approach towards regulating the market to prioritize investor protection. Seeing some progress in its efforts, the FSC and the rest of the local financial authorities in South Korea continued to regulate the space. In hindsight, the formation of the Kimchi Premium and the lack of investor protection in the cryptocurrency market throughout late 2017 and early 2018 led the government to properly regulate the market.
The latest decision of the FSC to clear banks to cooperate with crypto exchanges represent the willingness of the government to legitimize the market, reflecting the government’s previous plans released in July, to regulate cryptocurrency exchanges as proper financial institutions.
All of the major cryptocurrency exchanges in South Korea including Bithumb, Upbit, Coinone, and Korbit, the top four trading platforms in terms of daily trading volume, and every other minor cryptocurrency exchange will be entitled to fair banking service moving forward, as legitimate financial businesses.
Banks will not be able to reject crypto exchanges for any reason other than money laundering. As long as cryptocurrency exchanges are compliant with local KYC and AML regulations, then banks are not permitted to refrain from providing banking services to trading platforms.
South Korea’s court sides with crypto exchange in dispute with bank
On October 30, the Seoul Central District Court ruled on a case between a cryptocurrency exchange and a major bank in favor the exchange, further solidifying and strengthening the right of digital asset trading platforms to obtain fair, transparent, and stable banking services from local financial institutions.
On the same day FSC chairman Choi officially approved banks to work with crypto exchanges, the Seoul Central District Court released its decision on a court case between local cryptocurrency exchange, Coinis, and major commercial bank, Nonghyup.
In early September, Coinis filed a complaint in court after Nonghyup unilaterally ended its banking services to the exchange. Kim Tae-rim, a Seoul-based attorney who represented Coinis, claimed that Nonghyup had no right to abruptly end its services to the exchange.
Although Nonghyup responded that it had followed the guideline of the FSC, in lawfully rejecting to provide services to the exchange, the court sided with Coinis and requested the bank to resume services to the platform.
Attorney Kim stated that the case is a historic achievement for the cryptocurrency sector, as it will establish a precedent in the long-term and will discourage banks from unilaterally refusing to provide services to digital asset exchanges.
“Cryptocurrency exchanges, by default, have the right to freely deposit and withdraw funds to and from major banks in South Korea, and an abrupt termination of partnership and services by the bank [in this case Nonghyup] without sufficient evidence or reasoning falls under the breach of contract.”
For eight months, since January, Nonghyup also refused to provide services to Bithumb, which disallowed the largest exchange in South Korea from registering new users.
Image taken from CoinCap.io, top five exchanges in the crypto market
The renewal of the contract between Nonghyup and Bithumb came about after the exchange overhauled its security and internal management systems, subsequent to suffering two consecutive hacking attacks.
But, given the timing of the contract renewal, it is possible that the bank was anticipating the stance of the FSC prior to publicly announcing its deal with Bithumb. A Bithumb representative said at the time:
“Bithumb is now able to issue virtual bank accounts for new users after a partnership has been established with NH Bank. Bithumb will continue to comply with the bank’s guideline strictly while cooperating with the government to create a transparent and robust market for local investors.”
Throughout the years to come, exchanges that are approved by the FSC and local financial authorities, will face no issues in receiving bank support from every major bank in the country.
Chairman of Korea’s National Policy Committee calls for proper crypto adoption
On October 2, Min Byung-du, the chairman of Korea’s National Policy Committee, called for a proper adoption of cryptocurrencies and blockchain technology, encouraging the government to end its cautious approach towards regulating the space.
Chairman Min specifically addressed the imposition of a blanket ban on domestic initial coin offerings (ICOs) and firmly stated that the government has to embrace the rapidly growing market with practical, positive, and efficient regulatory frameworks that can facilitate the growth of the local sector.
Under the premise that money laundering, extreme speculation, and fraudulent operations are prevented with necessary regulation, chairman Min emphasized that the government should allow ICOs and other cryptocurrency-related activities.
“Regulation is not bad. Regulation is necessary, it is the only way to legitimize the market and allow investors to build trust towards the cryptocurrency market. The government cannot dismiss ICO. It needs to allow companies to conduct ICO. ICO has become a new trend in the global market and it is the responsibility and ability of the government to embrace new technologies. We can see that the flow of investment is clearly changing compared to ICO and angel fundraising. The ICO has raised $1.7 billion for Telegram and $4 billion for Block.One, It is getting bigger and bigger."
During his speech delivered to the Congress, chairman Min referred to ICOs as a primary example of innovation related to the fourth industrial revolution that is currently blocked out by the government. But, Min also added that other potential technologies and activities related to the asset class and the crypto sector have to be allowed for the country to remain at the forefront of blockchain technology development.
Perhaps influenced by the call of chairman Min, local publications have reported that the government is planning to allow domestic ICOs by the end of the year.
In January, a spokesperson of a cryptocurrency task force, established by the government of South Korea, told mainstream media outlet, Chosun, that the government was planning to allow institutional investors to invest in domestic ICOs. However, the report was met with fierce criticism and outrage from local investors.
“Currently, the task force is considering imposing stricter regulations for investor and consumer protection within the cryptocurrency market.” The spokesperson added “in regards to ICOs, the government will likely impose regulations to enable institutional investors to invest in ICOs.”
While Cointelegraph reported that FSC commissioner Choi expressed a negative stance towards the unregulated nature of ICOs, on October 26, Ministry of Science and ICT minister, Yoo Young-min, said the ministry is exploring the legalization of ICOs.
According to a local publication, a key government official explained that it is difficult to ban investors from participating in ICOs because they are conducted in a peer-to-peer manner using Bitcoin and Ethereum.
The official stated that it is better for the government to provide clarity, regulation, and taxation policy to regulate the space with sufficient investor protection.
“It is realistically difficult to outright ban ICOs. Given that it is challenging for local financial authorities to impose a blanket ban on ICOs, the government is currently favoring several policies like restrictive access to ICOs or strengthened regulation on ICOs as alternative solutions.”
Already, several regions in South Korea, such as the country’s two largest cities Seoul and Busan, have disclosed their plans to legalize ICOs in the upcoming months.
Jeju Island, which operates as an independent state that is permitted to have its own laws outside of federal laws, has also released its plans to adopt cryptocurrencies and legalize ICOs. Jeju Island is also currently finalizing its plans to create a special zone for global blockchain and cryptocurrencies that will operate as a crypto hub within the country.
Aspects of the local market that need improvement
On September 11, South Korea’s venture enterprise division formally decided to eliminate cryptocurrency exchanges from the newly drafted and proposed venture bill that provides small to medium-size companies with a variety of benefits including tax and investment merits.
The rationale of the venture enterprise division for eliminating digital asset trading platforms was its acknowledgement of cryptocurrency trading as gambling, which contradicts the government’s stance towards cryptocurrency exchanges and the recently released statement of FSC commissioner Choi.
Local exchanges, investors, and the South Korea Blockchain Association requested for clarity from the government regarding the questionable decision of the venture enterprise division that went against all of the positive efforts the government has demonstrated over the past eleven months to regulate the space.
“We cannot understand the government’s stance on cryptocurrency regulations, and it is completely illogical for the government to leave a rapidly growing industry out of a major bill like this,” an exchange operator who asked to remain anonymous due to the sensitivity of the issue, said.
The FSC also recently warned investors against cryptocurrency hedge funds, claiming that many public funds fail to represent legal investing tools that comply with South Korea’s Capital Markets Act.
Overall, the cryptocurrency market of South Korea remains highly positive in regards to the decision of the FSC to allow banks to work with crypto exchanges and issue virtual bank accounts to trading platforms without the risk of unilateral termination of service.
Over the months to come, the government is expected to work with the South Korea Blockchain Association, to strengthen KYC and AML systems employed by cryptocurrency exchanges and to implement sophisticated transaction monitoring systems to eliminate money laundering.