South Korea's Special Financial Law and Market Analysis: Cryptocurrency finally welcomes its name after 4 years of regulatory "passiveness"

On March 5, the National Assembly of Korea adopted an amendment to the "Related Laws on the Reporting and Use of Specific Financial Transaction Information" (referred to as the "Special Gold Act"), which defines cryptocurrencies and stipulates a cryptocurrency operating reporting system. Domestic legislation on cryptocurrencies. Here we will explain to you in four issues the amendments to the "Special Gold Law" that may affect the development of the Korean blockchain and cryptocurrency industry.

Why does the Special Law need to be amended?

The background to the amendments to the Special Law is firstly the cryptocurrency regulatory guidelines issued by the International Anti-Money Laundering Financial Action Task Force (FATF). The FATF is an international anti-money laundering organization set up to prevent the laundering of money and cut off the financial chain of various criminal organizations. The organization was established at the G7 summit in Paris, France in 1989, when the hot spot of the international community was to cut off the funding chain of drug trafficking organizations. In 2001, cutting the funding chain of terrorist organizations became the focus of the organization's work. In 2012, the focus of work shifted to curbing financial activities related to weapons of mass destruction. To prevent related international crimes, the organization has continued to broaden its jurisdiction by amending regulatory guidelines.

The FATF has been focusing on cryptocurrencies since 2015. Because at that time, cryptocurrencies started to become a new way of money laundering. With the increasing number of crimes related to cryptocurrencies, FATF believes that there is an urgent need to develop relevant regulatory measures and took action in 2018.

In October 2018, the FATF revised and formulated the "No. 15 Supervision Policy" to define cryptocurrencies as "virtual assets" and began to set up a system to prevent cryptocurrency money laundering. In June 2019, FATF issued an explanatory note on the "Regulatory Policy No. 15", and published regulatory guidelines for virtual assets (VA) and virtual asset service providers (VASP). US Treasury Representative Matthew Billingsley, who was the 30th rotating chairman of FATF at the time, spoke of the need for regulatory guidelines, saying "the lack of uniform regulatory guidelines will cause chaos in the international financial system."

In order to cope with the evaluation work carried out by the FATF program this year, the need to formulate amendments to the Special Gold Law is increasingly prominent. The FATF requires 35 member states to conduct a mutual assessment every ten years to check whether countries have implemented the FATF regulatory guidelines into the framework of domestic law. In the upcoming mutual evaluation to be held in June this year, whether to develop a cryptocurrency-related bill will be an important assessment.

Do FATF regulatory guidelines have to be followed?

The FATF's regulatory guidelines are not truly legally binding. However, countries and financial institutions that violate regulatory guidelines will be placed on the FATF blacklist and will not be able to conduct financial transactions with most countries around the world. For example, in 2014, the largest bank in France, BNP Paribas, was forced to pay US $ 8.87 billion (about 10.6 billion) to the US government in June of that year because it ignored large-scale financial transactions with Iran, Sudan, Cuba and other countries. Trillion won). Because of this, the bank experienced the largest net loss in history (about 6 trillion won) in the quarter, and the chairman was forced to resign. If the South Korean government and financial institutions wish to conduct international financial transactions normally, they must comply with the FATF regulatory guidelines. In other words, although it is not legally binding, failure to comply with FATF's regulatory guidelines will result in isolation from the global financial industry.

According to the FATF regulatory guidelines, the scope of VASP covers all types of cryptocurrency-related companies such as custodian companies that store cryptocurrencies, companies that operate cryptocurrency wallets, ICO project companies that issue cryptocurrencies, and cryptocurrency asset utilization companies. Anti-money laundering, submission of trader identity information (KYC) and other obligations.

The obligation to provide the identity information of the trader is also called the "Travel Rule" rule, which means that for customers with a transaction value of more than 1,000 US dollars (about 1.2 million won), VASP must confirm the name of the sender, account information, address of the sender and ID card Number, payee name, payee login account, etc.

The regulatory guidelines also clearly set out government obligations. According to the contents of the regulatory guidelines, countries must take measures to implement a business license system or registration qualification review system for VASP to prevent criminals and their associates from grasping or controlling VASP's operating rights. In addition, the regulatory guidelines require governments to continue to regulate VASPs and to adopt criminal, civil and administrative sanctions when necessary.

Why has South Korea passed relevant laws now?

In order to meet the mutual assessment of FATF, many countries have enacted relevant laws very early. The Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury, last year set guidelines for which regulations apply to the cryptocurrency industry. Around the time of FATF's promulgation of regulatory guidelines, countries have successively formulated reporting systems and compliance monitoring systems for cryptocurrency-related companies. As of now, financial institutions such as the United States FInCEN, the New York State Financial Supervisory Authority (NYDFS), the Japan Financial Services Agency, the Canadian Securities Regulatory Association, the British Financial Supervision Agency, and the Swiss Federal Financial Supervision Agency (FINMA) have implemented a licensing system or registration for VASP system.

In contrast, domestic authorities did not take any action until the FATF issued regulatory guidelines. Although South Korea established a "Joint Working Group on Virtual Currency-Related Institutions" under the auspices of the Finance Committee at the end of 2016, the working group did not actually operate and failed to reach an agreement on the nature of cryptocurrency (FATF is defined as a virtual asset). Because cryptocurrency is neither a currency nor a financial commodity, it belongs to a new kind of "existence".

The problem is that during the time of the working group's "negative inaction", the prices of cryptocurrencies such as Bitcoin have skyrocketed, so that Lee Luo-won, then the Prime Minister of the Republic of Korea, talked about this in person in November 2017, The problem of overheating the market is called "social pathological phenomenon". As the market overheated gradually caused a series of social problems, the working group began to be headed by the Legal Department. At that time, the government's attitude was that instead of including cryptocurrency into the institutional framework, it was better to eliminate it directly in the cradle. However, for a market that has already been born, but also a market of global scale, it is impossible to make it disappear simply by the limitation of a certain country. At the time, the government even proposed that the exchange be closed, but it caused a lot of controversy because it involved violations of private property rights.

As the cryptocurrency market fell across the board in 2018, market heat naturally declined. As the overheating phenomenon has converged, the government's attention on cryptocurrencies has also decreased, so the cryptocurrency industry has been allowed to survive on its own, and there has never been any legal standard for the market that stipulates whether it can be placed or not. Under the government's indifference or even intentional discrimination, companies that want to operate normally in the cryptocurrency industry are in dire straits, but those companies that aim at legal gaps and deceive are doing well.

In order not to be isolated by the global financial industry, the FFC takes steps

After the G20 summit in December 2018 reached an agreement around the FATF regulatory guidelines, the South Korean government realized the urgency of the matter and the FATF-related financial committees began to take urgent action. To keep pace with the FATF regulatory guidelines, South Korea must include provisions for virtual assets in the Special Gold Act. As a result, lawmakers (Communist Democratic Party members Zhu Lunjing, Quan Jixiu, Jin Bingxu, and Justice Future Party member Jin Xiumin) who have made amendments to the Special Law as soon as possible have launched amendments with generally similar contents.

However, the process of passing the amendments to the Special Law was not as smooth as expected. A bill must be reviewed by the bill review sub-committee of the competent committee (the governing committee of the Special Law is the administrative committee) from its initiation to the final passing of legislation. And finally voted through the Congress. Last year the importance of the bill was concealed by other hot bills, each time being excluded from the committee's discussions. It was not until October last year that the Subcommittee on the Review of the Council's Bill began to review this bill, and on November 25, the Plenary of the Council's Plenary finally passed four relevant amendments.

The Legal Judiciary Committee originally planned to review the bill on February 26, but was affected by the "three new crown epidemic bills", and the bill did not pass the review by the Legal Commission until March 4. The bill passed by the Legislative Assembly on March 5th finally integrated the contents of the four amendments initiated by Mr. Kim Byung-wook and others in March 2019, including the "Travel rule" and licensing system, which fully reflects the FATF regulatory guidelines content.

What are the contents of the amendments to the Special Law?

The amendment to the Special Law passed this time clarified the definition of virtual assets and virtual asset operators (VASP), stipulated the reporting obligations of cryptocurrency operators and operating companies, and completed the information protection management system (ISMS) certification, Use real names to confirm deposit and withdrawal accounts, and verify user identity (KYC). The amendment will take effect one year after the promulgation of the bill, with effect from March 2021.

First, cryptocurrency, virtual currency, virtual currency and other terms used to refer to cryptocurrency will be unified as "virtual assets", and transactions of virtual assets will be included in the scope of traditional "financial transactions". The "Special Law" also defines the legal status of cryptocurrency operators. According to the "VASP" concept proposed by the FATF regulatory guidelines, all activities such as the sale, exchange, storage and management of virtual assets are included in the "virtual asset transaction" range. This means that businesses that operate cryptocurrency wallets and provide related financial services, including cryptocurrency exchanges, need to be bound by this bill.

The "declaration system" stipulated in the amendment requires relevant companies to report to the Financial Information Analysis Institute (FIU) affiliated with the Financial Committee information such as the name and address of the company. Existing operators must complete their reporting obligations within six months of the amendment's formal entry into force (March 2021), that is, by September 2021. Violations of declaration obligations will be punished by imprisonment of up to 5 years and fines of up to 50 million won.

Cryptocurrency exchanges can only provide cryptocurrency services through "real-name verified deposit and withdrawal accounts". Currently, there are only four exchanges in Korea that have real-name verified deposit and withdrawal accounts: Upbit, Bithumb, Coinone, and Korbit. In addition, the exchange must also assume the obligation to verify the identity of the user and collect user information. For transactions over 10 million won, the exchange must verify the identity of the user. Once illegal and suspicious transactions are found, the exchange needs to report to the financial authorities in a timely manner.

JOIND Yuan Yuanran reporter won.jaeyeon@joongang.co.kr