South Korea Sows Confusion in Markets, Announces Strict AML Oversight
South Korea caused large cryptocurrency sell-offs after the justice minister said that the ministry is “basically” preparing a bill that would ban trading on cryptocurrency exchanges. The statement caused an outrage of public who joined their forces in a petition that has since been signed more than 220,000 times. The government has since decided to take the regulatory approach instead of banning all the cryptocurrency trading. Starting from January 30, it will require the cryptocurrency exchanges to share transaction data with banks to eliminate anonymous trading. Trading will be subject to strict AML and tax oversight.
There has been a lot of confusion and misinformation about South Korea’s intention to regulate the cryptocurrency exchanges. On January 11th, Justice minister Park Sang-ki said “There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges.” Accompanied by a report that the largest Korean cryptocurrency exchanges such as Coinone and Bithumb were raided by police and tax agencies, the market started panicking and prices started dropping.
Soon after the news broke, the spokesman of South Korea’s presidential office said that “Justice Minister Park’s comments related to shutdown of cryptocurrency exchanges is one of the measures prepared by the Ministry of Justice, but it’s not a measure that has been finalized.” An outrage by the South Korean public turned into a petition against regulation of cryptocurrencies and has since collected over 220,000 signatures. Since the petition reached more than 200,000 signatures, officials are obliged to respond within 30 days.
Trading cryptocurrencies has been popular in South Korea to say the least as more than 10% of the global traded volume of Bitcoin is traded against the Won. Bitcoin’s high demand in South Korea resulted in premiums of upwards of 20%. The local exchanges don’t allow trading by foreigners, which resulted in limited arbitrage opportunities and therefore a wide price gap. The difference was so high that it forced the popular cryptocurrency price tracker CoinMarketCap to remove South Korean exchanges from its listings because it was skewing the averages too much. The market further plummeted after the adjustment.
Adding more to the confusion, Choi Hyung-sik, a director of Financial Supervisory Service (FSS), confirmed that the regulator is investigating a claim that one of the members of their task force was using internal information to profit on market swings.
However, according to the FSS, the investigation is unrelated to the recent situation as the employee supposedly profited off the regulation that was announced on December 13. According to the reports, the employee who made the profit of 7Mn KRW ($6600) pleads that he was not aware of the upcoming regulation because he was on vacation at the time.
Because insider trading of cryptocurrencies is not currently regulated by the FSS, it is more probable that the employee will be accused of misuse of internal information. The government has since introduced a bill to add cryptocurrency holdings of 10Mn KRW or more (~$9300) to the list of public disclosure items.
On January 18, South Korea’s chief of the Financial Services Commission (FSC) said that “[the government] is considering both shutting down all local virtual currency exchanges or just the ones who have been violating the law.” The minister of the Office for Government Policy Coordination added that the government remains very divided on the issue but promised to make a decision during the parliamentary session on Thursday.
Since then, the FSC announced that it intends to “require cryptocurrency exchanges to share users’ transaction data with banks” in an effort to eliminate anonymous trading of cryptocurrencies. The new system will come into effect from January 30 starting with six commercial banks. FSC also stressed that the anti-money laundering (AML) obligations will be strengthened in order to “block illegal funds from money laundering as well as to filter out minors for whom virtual money investment is prohibited”. The government will have access to any transactions to or from the exchanges, which will also speed up taxation procedures.
Despite being divided on the issue, the South Korean government has clearly decided to take the strict regulatory approach instead of a complete ban on cryptocurrency trading. The future regulatory involvement of the different government bodies should be done in a more coordinated way to prevent confusion and uncertainty.
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