South Korea’s financial regulators set the pace for sweeping cryptocurrency regulations to curb speculative overheating and illegal activity, including banning foreigners and minors from opening new cryptocurrency accounts.
Financial Services Commission Vice Chairman Kim Yong-beom announced measures to ban anonymous trading on domestic exchanges, while foreigners and minors would be completely banned from trading through cryptocurrency accounts. Both measures go into effect 30 January.
They are the first concrete measures to be implemented since the government began observing overheating in the market in September. The system aims to tackle money laundering and related crimes, along with speculation-driven overheating in the market, Kang Young-soo, head of the FSC’s cryptocurrency response team said after the announcement.
“The government is concerned about manipulation of market conditions and injection of illegal funds while market funds are leaked into speculative investments,” he added. “We view that foreigners’ and minors’ investments contribute to our areas of concern.”
All foreigners, including residents, nonresidents and “kyopo” ethnic Koreans with foreign citizenship, will be banned from trading cryptocurrencies in Korea, the FSC’s foreign media department said by email. Minors are banned after Prime Minister Lee Nak-yeon earlier claimed the cryptocurrency craze could lead the youth toward crime.
“If they’re not Korean citizens, then they can invest in exchanges provided in their countries. Why do they have to invest in ours?” Kang quipped.
The government has been under mounting pressure to deliver on impending regulations over the country’s cryptocurrency market, one of the world’s largest for Bitcoin, Ethereum and Ripple, as the uncertainties have thrown global prices into turmoil. Cryptocurrency trade has gone largely unregulated as South Korea neither recognizes digital coins as financial products or currency.
But for the past few months, financial authorities and prosecutors have been mulling comprehensive regulations on anti-money laundering, tax evasion, fraud and other illegal activity, including a proposed ban on all initial coin offerings.
Justice Minister Park Sang-ki threw fuel on the speculative market when he claimed all crypto exchanges would be shut down. The government later clarified that it was one option being considered, along with only shutting down exchanges that were acting illegally. Since then, citizens have railed against the government with over 220,000 signing a petition to demand a response from the presidential Blue House.
“The government is creating boundaries for instances of foreigners injecting in coins into the country and a phenomenon of more Bitcoins and other cryptocurrency circulating within the Korean market,” says Kim Jin-hwa, corepresentative of the Korea Blockchain Association, which has about 30 member companies including several exchanges. “With the current conditions of our market, higher supply would equate to higher speculation.”
The targets of the latest regulation, says blockchain startup BlockchainOS Choi Yong-kwan, are Chinese investors who have flooded the cryptocurrency market since their country banned cryptocurrency trade last year. Digital coins from China enter Korean exchanges, then are illegally changed into foreign currencies, which are sent back to China, he explained.
Under the new rules, foreigners who have already have cryptocurrency trading accounts will be allowed to withdraw their assets, even after the new rules come into force, the FSC explained. But they will be banned from making new deposits through the accounts.
Meanwhile, all cryptocurrency investors need to establish an account under their legal name at one of six banks rather than anonymous cryptocurrency accounts to trade on a domestic cryptocurrency exchange. The so-called real-name system is part of efforts to establish measures similar to the Know Your Customer (KYC) verification system in the U.S. The Korea Blockchain Association’s member exchanges had already self-imposed an ID verification system for users who create new accounts as of Jan. 1, but this will be replaced by the government’s regulation.
Results of an investigation found that some companies handling cryptocurrency had been registered as “shopping malls,” but subject banks did not have customer verification procedures or internal systems to recognize this, the FSC said.
Also, funds deposited into cryptocurrency-handling companies have been deposited to accounts of the company’s major shareholders or its employees, and there have also been cases of deposits to cryptocurrency handling companies from corporate names.
These transactions are irregular managements of funds, the FSC said, as they can be identified as suspicious transactions because banks have not practiced faithful reporting of suspicious transactions.
Financial regulators are struggling to keep their own in line, as an investigation found that at least one official, aware of upcoming government announcements, used internal information to profit off cryptocurrency sales. In response, Prime Minister Lee has called for stronger codes of conduct for public servants, while Hong Nam-ki, Minister of the Office for Government Policy Coordination, urged civil servants not to trade during work hours.
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Meanwhile, blockchain insiders say regulators still have little understanding of the technology behind cryptocurrency, even as other government agencies such as the Ministry of ICT are promoting blockchain as part of the country’s “fourth industrial revolution” push.
The government must walk a fine line to foster the potential of blockchain technologies – which include cryptocurrency – while reining in dangerous behavior such as hacking and fraud. But uncertainty and strict regulations may risk an outflow of assets and innovation.