Korean Special Financial Law and Market Analysis: Only Predators Can Survive? What is the fate of the exchanges?

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After the South Korean Parliament held a formal meeting on March 5 to vote on the amendments to the "Related Laws on the Reporting and Use of Certain Financial Transaction Information" (hereinafter referred to as the "Special Law"), the exchanges were busy. Bithumb, Upbit, Korbit, Coinone and other exchanges that have obtained real-name verified deposit and withdrawal accounts (real-name accounts) have launched a joint anti-money laundering hotline last year; exchanges such as Gopax and Hanbitco that have not yet obtained real-name accounts are also seeking information protection management System (ISMS) certification, looking for ways to save themselves. So, what should the exchange do to survive the formal amendment of the Special Gold Law?

Exchange undertakes anti-money laundering obligations

Amendments to the "Special Law" passed by Congress will take effect one year after the bill is promulgated, during which specific implementation rules will be formulated to implement the relevant legal provisions. Looking at the large framework, the "Special Gold Law" responded to the "Travel Rule" and Anti-Money Laundering (AML) rules proposed by the FATF (International Anti-Money Laundering Financial Action Task Force), and formulated the ISMS certification system based on the domestic situation in Korea.

Most importantly, the bill shifted the responsibility for opening real-name accounts from banks to exchanges. Prior to this, the reason why banks refused to issue real-name accounts to the exchange was that in the event of money laundering problems by exchange users, the responsibility would be borne by the banks. For example, if the money laundering funds of users of the A exchange flow into the US sanctioned terrorist organizations, the banks that provide real-name accounts to the A exchange will be sanctioned together. At that time, the banks will not only be fined by the U.S. government, but will also be prohibited from conducting financial transactions with the United States transaction. The inability to conduct financial transactions with the United States means that banks will not be able to conduct transactions in U.S. dollars, which is tantamount to a death sentence. The Bank of Korea (BDA), which was sanctioned for money laundering in North Korea in 2005, ended in bankruptcy.

However, in the future, the responsibility for money laundering by exchange users will be borne entirely by the exchange. In this way, as long as the legal conditions are met, there is no reason for the bank to continue to refuse to issue real-name accounts for the exchange.

However, the exchange also needs to first meet the requirements for applying for a real-name account. To survive in the new environment, exchanges must first have the infrastructure required by the bill. The four major exchanges mentioned earlier, Bithumb, Upbit, Korbit, and Coinone, have established a joint anti-money laundering interoperability hotline in January last year and obtained ISMS certification. In addition to the four major exchanges, Gopax and Hanbitco also received ISMS certification.

Distressing "Travel Rule", KYC is also a must

The "Travel Rule" clause is also quite disturbing. The clause stipulates that when users trade cryptocurrencies, the exchange must collect and save all information of remittances and payees. Therefore, each exchange is strengthening the user identity verification (KYC) system. One of the most interesting Upbit exchanges. The exchange has strengthened KYC last year, and at the beginning of this year, it has once restricted foreigners 'withdrawal services to strengthen KYC, which has caused a lot of controversy (however, the exchange's recent restrictions on foreigners' withdrawals have nothing to do with KYC, but because Tax issues).

Exchanges already closed

Before the "Special Gold Law" came into effect, exchanges have gradually reduced their business scope or ceased operations. CPDAX is typical of them. CPDAX is a cryptocurrency exchange operated by Korea's earliest blockchain platform "Coinplug". In February of this year, CPDAX announced that it would stop trading in Ethereum, the second largest cryptocurrency by market capitalization. Coinplug said that "the scope of exchange business will be gradually reduced" and "the future will focus on the development of decentralized identification (DID) business". Industry analysts believe that although the official contraction announced by the exchange is due to insufficient trading volume, it is actually operating pressure caused by various regulatory issues.

There are similar situations abroad. Coinone stopped services in Indonesia this February. Because Indonesian Commodity Futures Trading Authority (BAPPEBTI) announced from February 2020 that only licensed exchanges are allowed to operate, and Coinone has failed to meet the licensing standards.

In the later period, after the introduction of the implementation rules of the Special Law, it is expected that the number of exchanges withdrawing from the market will increase further. The stricter the qualification requirements for establishing an exchange, the higher the threshold for small and medium-sized exchanges to enter the market.

Only a few large exchanges may survive in the end

 

The special gold law has laid the institutional foundation for the development of the cryptocurrency industry, which is generally welcomed in the industry. Exchanges previously unable to obtain real-name accounts will have the opportunity to apply for real-name accounts in accordance with the "Special Gold Law", and other financial companies and large enterprises that dare not enter the market rashly due to the uncertainty of the regulatory system will also have the opportunity to enter market.

However, only companies with sufficient capital can enjoy these bright prospects. The barriers to compliance with the "Travel Rule" and ISMS certification are high. How many transactions have all the capabilities to meet such conditions? The "Hexlant" of the Institute of Blockchain Technology and the "Virtual Asset Supervision and Special Gold Law Analysis Report" recently released by Pacific Law Firm mentioned that it will cost hundreds of millions of won to pass the ISMS certification review. For start-ups and small and medium-sized exchanges with insufficient capital power, it may not be possible to cross the threshold of the market from the beginning.

Conditions for issuing real-name accounts are set by the Finance Committee

Applying for a real-name account is also a problem. Earlier, the official explanation given by the bank was that because the bank had to bear joint and several responsibilities when there was a problem with money laundering by exchange users, banks generally tabooed issuing real-name accounts to the exchange. However, the industry generally believes that this reason is just a "bright reason". The actual reason is that banks look at the financial authorities and are reluctant to issue real-name accounts.

The bill does not stipulate the specific conditions and procedures for issuing real-name accounts, which need to be formulated separately in the implementation rules, which are prepared by the competent financial committee. Therefore, if the Financial Commission does not change its negative perception of cryptocurrencies and intends to curb the development of the industry, it can formulate harsh real-name account issuance conditions and procedures in the implementation rules. I thought the finish line of the marathon was near, and I found it when I ran to it. This is just the mid-point return line.

JOIND Park Sang Ge reporter park.sanghyuk@joongang.co.kr