South Korea blockchain regulation policy and practice

(For more details, see Deng Jianpeng, Sun Penglei: “Intermediary Chain Supervision and Compliance Response”, Mechanical Industry Press, February 2019)

First, South Korea's speculation "frenzy"

South Korea is an important part of the global blockchain community. Virtual currency has been very popular in Korea in recent years and reached its peak in 2017. According to relevant reports from Sohu.com, the total population of South Korea is about 50 million, and the number of virtual currency investors is 3.5-400 million, accounting for 8% of the national population ^[1] . Such a high proportion reflects the local speculation frenzy may be the world. Unique. As of July 2017, according to market data, the Korean Bitcoin trading market is handling more than 14% of the world's bitcoin transactions, which is the third largest market after the United States and Japan ^[2] . The unprecedented enthusiasm of Koreans has boosted the demand for Bitcoin. According to the statistics of Korean media in March 2018, the number of Korean speculators has reached 2/3 of the stock market. South Korea imposes strict capital controls. In the local virtual currency exchange, traders must have three necessary conditions – mobile phone, bank account and verification – in order to use legal tender and virtual currency transactions. This has led to the Korean virtual currency market becoming a trading game in the local area network, which cannot be used to cross-border the price of the currency, [3] therefore, in the longer term, the price of Korean virtual currency (such as bitcoin) is 10% higher than the international market. even more. However, the attitude of the Korean regulatory authorities against virtual currency has suddenly changed. In September 2017, domestic companies were banned from participating in the ICO, and new prohibitions were introduced in the following months.

Second, the regulatory policy and its transformation

In February 2016, the Bank of Korea proposed to encourage the exploration of blockchain technology in its report. In October of the same year, South Korea's top financial regulator, the Financial Services Commission (FSC), announced a two-step plan for financial technology development, which mentioned the gradual institutionalization of virtual currency regulation such as Bitcoin. In December 2016, the Korea Financial Investment Association led a group of 21 financial investment companies and five blockchain technology companies to form a blockchain association to promote the Korean blockchain industry. The association has always played the role of a think tank in the blockchain capital market in South Korea, and has introduced self-discipline rules. However, the current association has limited influence on regulators.

From 2016 to 2017, the virtual currency boom continues to heat up in Korea. By July 2017, the South Korean government legalized the way of bitcoin remittances, allowing financial technology companies to process bitcoins worth up to $20,000 worth of Korean won for users. Therefore, the local exchange platform is linked to the Korea Financial Services Commission (FSC), which requires at least $436,000 in capital and performs user identification (KYC) and anti-money laundering (AML) to provide data processing facilities to obtain regulatory Approved ^[4] .

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In September 2017, almost in sync with China's regulatory policies, FSC's attitude toward virtual currency suddenly changed, prohibiting domestic companies from participating in ICO. FSC stated that the token issuance financing model violates the capital market law and imposes severe penalties on those involved in the ICO. The FSC initiative was intended to crack down on fraud in the virtual currency sector, but in the extremely hot South Korean virtual currency market, it became an indiscriminate blow to virtual currency trading.

In the following months, South Korea banned anonymous transactions on domestic exchanges. Investors who want to trade on the Korean virtual currency exchange need real-name certification, and fill in their account with their real names in one of the six designated banks. In addition, foreigners ^[5] and minors are prohibited from trading through cryptocurrency accounts. In March 2018, South Korea issued a ban, public officials are not allowed to hold and trade virtual currency, but the Korean Finance Minister said that it will not ban ordinary citizens' virtual currency transactions. ^[6]

In March 2018, many countries jointly proposed cryptocurrency regulation with a deadline of July, calling for the development of "International Standards Development Organizations (SSBs)." Subsequently, the South Korean government reversed its attitude towards blockchain and virtual currency. The Korean National Assembly formally proposed a plan to lift the ICO ban in May and officially lifted the ICO in June, but the ICO still faces more stringent regulations. ^{[7] The} issuance of tokens is greatly limited.

Third, the virtual currency tax regulations

In January 2018, the South Korean government announced a tax on virtual currency exchanges, with a tax rate of 24.2%. All virtual currency trading platforms in Korea are subject to a 22% corporate tax and a 2.2% local income tax. In July 2018, the South Korean government first announced that in the first quarter of 2019, 15 technology-based enterprises in 11 fields, including the blockchain, would be subject to tax reduction, and 10 days later, the tax reduction policy was announced: SME tax relief 30%-40%, tax reduction for large enterprises is 20%-30%. Under the support of the tax reduction policy, Korean companies have entered the blockchain industry and established blockchain R&D teams or studios. Blockchain applications in South Korea that are currently at or near landing involve securities, payments, social, gaming, travel and medical. ^[8]

Fourth, virtual currency supervision practice

In the past more than a year of practice, the Korean virtual currency has experienced “two-days of ice and fire”, from “the craze for the whole people” to “full ban”, and the protests of the people have turned to the regulatory authorities, and the regulatory attitude has gradually warmed up. The South Korean government's policies on virtual currency and even blockchain are becoming clearer, but the virtual currency-related areas are still facing more stringent regulations. In early August 2018, the Korea Blockchain Enterprise Promotion Association (KBEPA) called on the Korean government to take measures to regulate and promote the development of the blockchain industry, instead of focusing only on its “short-term negative impacts”. This sentence is Korea. A microcosm of the road to blockchain and virtual currency regulation.

South Korea has adopted an administrative directive to require the ICO to be banned in its own country. Like China, most of the projects went overseas, especially to ICO in Singapore, but mainly for Koreans. Specifically, the Korean project party has set up some shell companies in Singapore, various tokens in Singapore, and technology development in Korea. The tokens are mainly purchased by investment institutions. This situation is very similar to Chinese practice.

According to my knowledge of local research conducted in the second half of 2018, there is no need for a license to open a virtual currency exchange in South Korea, and the relevant exchange is registered as an e-commerce license. In May 2018, the Korea Statistics Bureau called the exchange "digital asset trading industry" for the convenience of naming. At present, there are nearly 30 exchanges in Korea, and the exchange can operate legally. In early Korea, there were four major exchanges applying for bank virtual accounts. However, banks are no longer opening accounts for new exchanges. Therefore, except for the early four major exchanges, other exchanges can only trade in coins.

It is reported that the Chinese affiliates that currently have trading business in South Korea have two coins, Okex and Firecoin. South Korea’s current motion to trade all licenses is attempting to include the exchange in the Capital Markets Act, which is similar to financial law. However, for South Korean politics, North-South relations are of the utmost importance, and current government interest is limited to legislation and regulation such as exchanges. As a result, the relevant legislation is less efficient and the motion has not yet been incorporated into the legislative agenda. Although the exchange has not yet been incorporated into the law, the Korean exchange often encounters public authorities to inspect related businesses. The original four old exchanges were all inspected by the prosecution, some shareholders were convicted of misappropriation of funds (misappropriation of client funds), and an exchange owner was detained. To this end, each exchange is engaged in the basic requirements of KYC, AML and other supervision, the exchange requires customers to provide proof of residence when registering.

Korean traders value the opening of the legal currency account channel, so there are a number of veteran exchanges that can engage in fiat currency and virtual currency trading. At the same time, overseas well-known exchanges have settled in South Korea, strengthening localization and transforming, bringing greater competitive pressure to some local exchanges. Whether the bank opens an account for the virtual currency exchange, one depends on the government's position (currently unclear), and the second is that after the account is opened for trading, the pressure on anti-money laundering is large, and the input and output are not proportional, so there is no motivation. Opening a legal currency bank account helps the exchange to open up the market. Therefore, it is unconstitutional for an exchange to sue the Korean Constitutional Court for not opening an account for the exchange customer, but there is no result yet. South Korea's virtual currency can't be leveraged. There has been a similar case. Because the exchange launched a leveraged transaction, the actual controller was convicted of opening a casino.

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[1] See Sohu.com: "Uncovering the Korean Gambling Forces: Nearly 10% of the Population Participation", http://www.sohu.com/a/233793126_642762, visit time: September 30, 2018.

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