South Korea is one of the most developed countries in the world and a key Asian economy known for its technological business. Unsurprisingly, the country has become a pioneer in the blockchain industry. Following the technology of the distributed ledger, the trade of cryptocurrencies also came to South Korea, a business which quickly gained popularity among the inhabitants of the country. In particular, this applies to young Koreans, a fact which is confirmed by surveys.
The South Korean won also remains one of the most popular fiat currencies to exchange for Bitcoins, although it is far from the values of the end of 2017. After the fall of the market and a number of scandals, the South Korean crypto exchange markets dropped out of the top ten in terms of trading volume and seceded the market to competitors from China, the United States, and Japan, although they managed to maintain their leading positions.
At the same time, the authorities of South Korea managed to change the verdict from total denial of cryptocurrency to an understanding of the need for regulation of the industry and have already taken a number of measures in this direction. An active discussion regarding the future of the law on cryptocurrencies is still ongoing.
Cryptocurrencies: To Forbid or to Allow?
The process of regulating cryptocurrencies in South Korea reached the legally official level in November 2016, when, on the initiative of the South Korean financial regulator, the Financial Services Commission (FSC), an interdepartmental group was established in the government, which became the main center for resolving the issue of legalization of cryptocurrencies. In addition to the FSC, the group included its division, the Financial Supervision Service (FSS), as well as the Bank of South Korea, the Ministry of Strategy and Finance, and other related departments.
The first version of the law on cryptocurrencies was introduced in the summer of 2017 by Pak Yong-jin, a member of the South Korean parliament the National Assembly. It was a draft amendment to the "Electronic Financial Transactions Law," according to which all participants in the trade of crypto assets had to register with the FSC, make pledges, and pass identification checks.
The initiative was not developed further. Instead, in September, the FSS prevented South Korean companies from conducting initial coin offerings (ICO) because of threats of fraud and money laundering. Then, the Ministry of Justice joined the discussion on the future of cryptocurrencies and played the role of a "bad cop,” as the head of the Ministry Park Sang-ki reported in December that the ministry was working on a bill for the complete prohibition of trade in cryptocurrencies in an effort to "protect investors.” This statement brought the rate of Bitcoin down, and the market started talking about the "Chinese scenario" in South Korea.
The head of the analysis and research group of the ICBF, Pavel Shchipanov, believes that such a ban was caused by the authorities' desire to take control of the situation: "Many states, which are currently in the process of seeking solutions to regulate cryptocurrencies, are among the first to take restraining measures. In a number of cases, this is due to the desire to artificially slow down the development of the blockchain economy, before it starts dictating terms instead of the state itself."
The head of the Ministry of Justice of South Korea publicly repeated his thesis in January, followed by police raids on the Bithumb and Coinone crypto exchanges. This forced them to counterattack the opponents of a total ban from the government's economics division. On the same day, the Ministry of Strategy and Finance issued a statement in which it stated that it learned about the proposal of the Ministry of Justice from the media and directly objected: "We do not share the same views as the Ministry of Justice on a potential cryptocurrency exchange ban," the report said.
The situation had to be intervened at the highest level. A few days later, a statement was made by the representative of the Presidential Administration of South Korea. He said that the Ministry of Justice only made a proposal that will be considered by the interdepartmental commission, stressing that the government will "will pursue the crackdown on anonymous cryptocurrency trading accounts.” The threat of a complete ban on cryptocurrencies was over, but the issue of regulatory boundaries remained on the agenda.
Whip and Carrot for Cryptos
One of the first steps of the "new policy" was the introduction of a ban on anonymous trade, which entered into force on January 30. After just a week, the three largest South Korean banks already reported on the transfer to special registered accounts of already about 10 percent of participants in the cryptocurrency trade. The head of the FSS praised this trend, publicly declaring that the authorities will continue to support "normal operations" with cryptocurrencies.
Maria Agranovskaya, managing partner and head of the blockchain practice of the GRAD law collegiate, stresses that the fight against anonymity is a global trend: "To carry out transactions with cryptocurrencies and operations in banks with funds received from crypto trade in even the most insignificant limits, both crypto exchanges and banks ask investors for information to conduct KYC and AML procedures. This can somewhat slow down the implementation of transactions with cryptocurrencies, but, in general, it is the correct mechanism."
Against the backdrop of the authorities' increased interest in the cryptocurrency industry, the Korean Blockchain Association (KBA), which includes the country's cryptocurrency exchanges, has stepped up. In April, the KBA established a set of rules for trading platforms, which were to become a self-regulatory mechanism.
They introduced obligations to identify all users, store the history of operations for five years, and monitor and suppress suspicious transactions. Each exchange had to take control of the placement of new coins, and the issuing company was obligated to confirm the presence of its own capital of at least two billion won (approximately $1.75 million), and regularly provide financial statements from the exchange.
The KBA created a working group that started checking the 14 major crypto exchanges for compliance with the new rules. Although by July, only 12 of them had been audited. KBA auditors were criticized for not checking cybersecurity systems. Shortly before that, however, government agencies initiated the cyber defense audit of trading platforms.
The fears had grounds, as hackers inflict considerable damage on the South Korean currency trade. In June, criminals stole about $30 million from Bithumb's accounts and about $37 million from Coinrail. In December 2017, after a second cyber attack, the criminals stole 17 percent of all assets from Yobit, the largest attack at that time. The trading platform was able to recover only 75 percent of the losses, after which it went bankrupt.
The authorities are also closely watching the work of the exchanges. In March, searches were imposed on three exchanges, and in April, the police arrested several top managers of Coinnest, suspecting them of illegally misappropriating client funds worth tens of millions of dollars. A month later, a similar situation occurred with the exchange Upbit.
The legal status of crypto exchanges remains unclear. Now they are registered in South Korea as communication operators, and not as trading platforms, and accordingly, they are not formally subject to the requirements of the financial legislation.
In June, the South Korea Financial Intelligence Unit said that in order to eliminate this conflict, a law is being prepared along with deputies of the National Assembly, which legalizes the exchange of crypto assets, equating them to commercial banks. In July, it also became known that several ministries are working on developing a classification of organizations within the blockchain industry, and crypto exchanges play the role of trading and brokerage sites. "Most likely, in South Korea, cryptocurrencies will be classified as "financial assets.” In this case, there will be a need to adopt appropriate regulation of treatment, accounting, and taxation of such financial assets in the country,” as said by the senior lawyer of the GRAD law collegiate Maria Brook.
Return of the ICOs
Despite the current ban, token sales can be legalized in the future. In May of this year, a group of deputies led by a representative of the ruling Democratic Party of Korea announced plans to introduce a bill that would allow the ICOs to be "controlled by the government." The leader of the group of lawmakers, Hong Yi Rak, said that their primary goal is "to help remove the uncertainties faced by the companies of the blockchain industry." According to the bill, ICOs will have to be conducted by public companies under FSC control, and their purpose should be the development of DLT technologies. The forum dedicated to the draft law was also attended by the Speaker of the South Korean Parliament, who stated that "blockchain and cryptocurrencies can be used for good purposes.”
A possible compromise for the regulation of ICOs may be the idea from the governor of the South Korean province of Jeju located on the island with the same name. The head of the region proposed in August to create a special zone on the island for carrying out token sales, similar to the "Crypto Valley" in Switzerland.
Pavel Shchipanov from the ICBF believes that in the future law on cryptocurrencies, if it is accepted, ICO regulations will be imposed, such as guarantees of investor protection, rules combating money laundering, an increased in resources for countering cyber attacks, and the introduction of simplified procedures for launching blockchain projects.
In Line with the Policy of the G20
Legalization of cryptocurrencies in South Korea is facilitated by the organization of the G20 countries, of which South Korea is a member.
In March of this year, the capital of Argentina, Buenos Aires, hosted a meeting of finance ministries and heads of central banks of the G20. Following the results of the summit, the communique said that crypto assets could "increase efficiency and expand the penetration of the financial system and economy," and also announced the beginning of the process of preparing international standards for the regulation of the cryptocurrency sector.
The deadline for the development of proposals was set for July. At the beginning of the month, information appeared that, in accordance with the decisions of the G20 summit, the South Korean financial controller FSC was engaged in the development of "common rules" for the operation of crypto exchanges. Another result was the news that the Ministry of Strategy and Finance of South Korea was preparing a proposal for the introduction of taxation of cryptocurrencies. According to Mary Brook, "it cannot be ruled out that South Korea will adopt amendments to tax legislation in order to exclude crypto exchanges from entities receiving corporate tax deductions, and, possibly, will impose a tax on income from the sale of cryptocurrencies."
The next meeting of the financial authorities of the G20 took place at the end of July. The document on its results stated that "cryptocurrencies do not pose a threat to global financial stability," and a special section of the organization published a draft of an international standard for the regulation of crypto assets. On the eve of the summit, the South Korean FSC announced the creation of the Financial Innovation Bureau (FIB), a separate unit that will focus on the introduction and development of the blockchain industry and cryptocurrencies.
South Korea readily accepted the concept of the "Fourth Industrial Revolution" proclaimed at the World Economic Forum in 2016, which also recognized blockchain as part of this process. In late May, it became known that the specially-created committee of the "Fourth Industrial Revolution" would be responsible for the development of legislation in the field of the blockchain industry and, in particular, the laws on ICOs and cryptocurrencies in the National Assembly of South Korea.
And in June, the authorities of South Korea and the United States announced the unification of efforts to develop information and communication technologies. In addition to blockchain, the countries will cooperate in the development of the digital economy, mobile communications, and artificial intelligence. The participants of the press conference dedicated to the event stated that "information is the key resource of the Fourth Industrial Revolution.”
On the Way to the "White Zone"
Although the South Korean cryptocurrency market is going through hard times, the authorities and businesses are actively involved in creating a legal space for the work of "digital money.” The contours of future rules can be identified right now and include the deanonymization of trade participants, taxation, controlled ICOs, and protection of investors' rights.
The legalization of the cryptocurrency market is being actively promoted not only by the South Korean authorities, the blockchain community, and world organizations but also by the officials themselves. In early August, the head of the financial regulator FSC even asked the National Assembly to pass a law on cryptocurrencies "as soon as possible," expressing the hope that the deputies will adopt the law before the end of this year.
"The latest trends say that the South Korean government has turned its face to the crypto business: work is underway to simplify bureaucratic procedures for blockchain projects, state courses are being given that teach the basics of blockchain technologies and crypto economics," notes Pavel Shchipanov. According to him, "it is likely that the quality standards set by South Korea will be scaled to other world companies, which will certainly spur the market."
Maria Agranovskaya adds that the South Korean government "plans to gradually reduce control over the cryptocurrency sector, focusing on the G20's cryptocurrency strategy," and "is focused on cooperation with other states in this matter, for example, with China." Thus, in July 2018, the countries signed an agreement to cooperate in the field of financial supervision over the cryptocurrency market: "In this connection, it can be assumed that China, guided by the same logic as the leaders of South Korea, will want to at least partially reconsider its position of strict prohibition in respect of the cryptocurrency market,” sums up the expert.