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[On the Bar] Virtual currency and its anti-money laundering obligations in Korea
By Korea HeraldPublished : Dec. 25, 2018 - 14:59
On the Bar is a regular column written by attorneys at Yoon & Yang LLC on various laws and regulations that affect running a business in Korea. The content provided here is general legal information. -- Ed.
In September 2017, in response to a surge in virtual currency transactions in mid-2017, the Financial Services Commission ultimately banned raising money through initial coin offerings for all types of virtual currencies.
Subsequently, as the trading volume of virtual currencies in Korea dramatically increased again at the end of 2017, there were rising concerns among Korean officials that measures were needed to prevent the side effects of virtual currency transactions, such as money laundering or tax evasion, and to minimize the potential victims of speculative virtual currency transactions, so as not to repeat the Dutch Tulip Mania of the 17th century.
However, as the Korean government has not passed any legislation specifically applying to virtual currencies, there are no legal means to directly regulate virtual currency speculation.
As such, the Korean government has adopted indirect measures to restrict speculation on virtual currencies by temporarily blocking funds flowing into virtual currencies.
On Dec. 28, 2017, the FSC announced special measures for the elimination of virtual currency speculation.”
Major features of the measures include the real-name account system for virtual currency transactions; on-site inspection by financial institutions; and heightened anti-money-laundering (AML) obligations for financial institutions against virtual currency exchanges.
In September 2017, in response to a surge in virtual currency transactions in mid-2017, the Financial Services Commission ultimately banned raising money through initial coin offerings for all types of virtual currencies.
Subsequently, as the trading volume of virtual currencies in Korea dramatically increased again at the end of 2017, there were rising concerns among Korean officials that measures were needed to prevent the side effects of virtual currency transactions, such as money laundering or tax evasion, and to minimize the potential victims of speculative virtual currency transactions, so as not to repeat the Dutch Tulip Mania of the 17th century.
However, as the Korean government has not passed any legislation specifically applying to virtual currencies, there are no legal means to directly regulate virtual currency speculation.
As such, the Korean government has adopted indirect measures to restrict speculation on virtual currencies by temporarily blocking funds flowing into virtual currencies.
On Dec. 28, 2017, the FSC announced special measures for the elimination of virtual currency speculation.”
Major features of the measures include the real-name account system for virtual currency transactions; on-site inspection by financial institutions; and heightened anti-money-laundering (AML) obligations for financial institutions against virtual currency exchanges.
Although the legal basis for implementing the special measures has not been specified, the relevant statute is that of Reporting and Using Specific Financial Transaction Information.
Upon the implementation of the special measures, any inflow into the virtual exchange was totally banned after January 2018.
On Jan. 13, 2018, the FSC additionally released the Virtual Currency-Related AML Guideline.
The guideline implements the real-name account system, allowing only a deposit and/or a withdrawal between the bank account of verified users and the account of virtual currency exchange at the same bank.
It also requires financial institutions to conduct enhanced due diligence in transactions with virtual currency exchanges in order to prevent money-laundering issues arising from transactions between financial institutions and virtual currency exchanges. The guideline also requires financial institutions to submit a Suspicious Transaction Report for suspicious transactions prescribed by the Guideline to the Financial Intelligence Unit.
The Korean government has successfully blocked inflows into virtual currency exchanges by imposing AML obligations on financial institutions, thereby restricting speculative trends in virtual currency transactions from an early stage.
It is generally accepted that victims of declines in the value of virtual currencies did not expand to become a social problem because of the restrictive policy on virtual currencies.
However, the aforementioned government policies per se exceed the scope of AML obligations -- which are supposed to inspect, confirm, and report the source, acquisition and disposition of illegal funds -- as they impose onerous obligations on financial institutions.
In other words, although the government asserts to have statutory basis on the AML law, the Korean government’s current ban on virtual currency transactions within Korea by imposing unduly onerous obligations exceeds the scope of AML obligations on financial institutions.
Meanwhile, the Specific Financial Information Act -- imposing AML obligations directly on virtual currency exchanges by recognizing them as traditional financial institutions -- was recently proposed.
Furthermore, the Korean court recently upheld that a bank cannot unilaterally terminate financial transaction with a virtual currency exchange merely based on the guideline. In the case, the bank at issue unilaterally notified the termination of financial transaction with a virtual currency exchange that had received funds without using the real-name account system.
As the guideline cannot serve as valid statutory basis for current restrictions on virtual currencies, the government needs to amend the Special Financial Information Act for direct control over virtual currency transactions.
As the government recognizes both the intrinsic value of virtual currencies and the potential AML issues arising from virtual currencies, it is imperative to consider directly imposing AML obligations on virtual currency exchanges through amendment of the Specific Financial Information Act, thereby enhancing the transparency of virtual currency transactions. This will be the basis for healthy development of the virtual currency industry in Korea.
Upon the implementation of the special measures, any inflow into the virtual exchange was totally banned after January 2018.
On Jan. 13, 2018, the FSC additionally released the Virtual Currency-Related AML Guideline.
The guideline implements the real-name account system, allowing only a deposit and/or a withdrawal between the bank account of verified users and the account of virtual currency exchange at the same bank.
It also requires financial institutions to conduct enhanced due diligence in transactions with virtual currency exchanges in order to prevent money-laundering issues arising from transactions between financial institutions and virtual currency exchanges. The guideline also requires financial institutions to submit a Suspicious Transaction Report for suspicious transactions prescribed by the Guideline to the Financial Intelligence Unit.
The Korean government has successfully blocked inflows into virtual currency exchanges by imposing AML obligations on financial institutions, thereby restricting speculative trends in virtual currency transactions from an early stage.
It is generally accepted that victims of declines in the value of virtual currencies did not expand to become a social problem because of the restrictive policy on virtual currencies.
However, the aforementioned government policies per se exceed the scope of AML obligations -- which are supposed to inspect, confirm, and report the source, acquisition and disposition of illegal funds -- as they impose onerous obligations on financial institutions.
In other words, although the government asserts to have statutory basis on the AML law, the Korean government’s current ban on virtual currency transactions within Korea by imposing unduly onerous obligations exceeds the scope of AML obligations on financial institutions.
Meanwhile, the Specific Financial Information Act -- imposing AML obligations directly on virtual currency exchanges by recognizing them as traditional financial institutions -- was recently proposed.
Furthermore, the Korean court recently upheld that a bank cannot unilaterally terminate financial transaction with a virtual currency exchange merely based on the guideline. In the case, the bank at issue unilaterally notified the termination of financial transaction with a virtual currency exchange that had received funds without using the real-name account system.
As the guideline cannot serve as valid statutory basis for current restrictions on virtual currencies, the government needs to amend the Special Financial Information Act for direct control over virtual currency transactions.
As the government recognizes both the intrinsic value of virtual currencies and the potential AML issues arising from virtual currencies, it is imperative to consider directly imposing AML obligations on virtual currency exchanges through amendment of the Specific Financial Information Act, thereby enhancing the transparency of virtual currency transactions. This will be the basis for healthy development of the virtual currency industry in Korea.
By Lee Bo-hyun and Lee Ji-min
Lee Bo-hyun is a partner attorney at Yoon & Yang LLC and a legal expert in the areas of banking, finance, corporate and virtual currency-related transactions. Lee Ji-min is an associate attorney (US qualified) at Yoon & Yang LLC and a legal expert in general corporate matters, banking and finance.
Lee Bo-hyun is a partner attorney at Yoon & Yang LLC and a legal expert in the areas of banking, finance, corporate and virtual currency-related transactions. Lee Ji-min is an associate attorney (US qualified) at Yoon & Yang LLC and a legal expert in general corporate matters, banking and finance.
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Articles by Korea Herald
