The South Korean government is making an effort to clamp down on cryptocurrency speculation but investors are flocking into small and mid-size cryptocurrency exchanges that are in legal limbo, getting around the regulations.
According to investment banking industry sources on January 8, an increasing number of people are scrambling to sign up for small and mid-size cryptocurrency exchanges that accept deposits of new members, including Gopax, Coinlink and Komid. Unlike large exchanges, such as Upbit, Bithumb, Coinone and Korbit, the exchanges receive deposits through business accounts since they cannot cooperate in virtual account business with banks. Accordingly, investors found a detour as banks have decided to stop opening new virtual accounts intended for cryptocurrency transactions until large exchanges introduce a real-name trade system.
The problem is that these small and mid-size exchanges have a small amount of capital and low level of security that makes it vulnerable to security incidents like hacking. Moreover, newly established exchanges or small and mid-size exchanges are not a member of the Blockchain Association that has a self regulating system. Therefore, they are not regulated by new listing of digital coins or aggressive marketing activities at all.
The authorities say that it is difficult for the exchanges to do business without virtual accounts but they are already covering a considerable number of clients with business accounts alone. Coinnest, which have received deposits from customers through its business account, ranked fourth or fifth in terms of transactions in the last 24 hours at 250 billion won (US$234.08 million). Coinrail and Gopax processed 80 billion won (US$74.91 million) and 20 billion won (US$18.73 million) of transactions respectively.
To top it off, some point out that there will no way to intervene when these exchanges continue to do business using their corporate accounts even after the government introduces the real-name financial transaction system. There will be no justification for banks to refuse businesses’ request to open accounts and it will be hard to detect money laundering.
In this regard, Financial Services Commission (FSC) Chairman Choi Jong-ku said on January 8, “We will consider and push ahead with all possible alternatives including shutting down the cryptocurrency exchanges.”
At a press conference held at the Government Complex Seoul in Sejong-ro, he said, “No one knows exactly what is happening in cryptocurrency exchanges at the moment when there are actually no direct regulation systems for cryptocurrency exchanges.”
The financial authorities will first inspect local banks over virtual currency transactions. Choi said, “Virtual currency transactions are highly susceptible for money laundering, like the concealment of crime and illegal money, given that the transactions implicate anonymity and are not made face-to-face. Banks should take the role of gatekeepers that prevent the circulation of crime and illegal funds but they aid and abet it instead.”
The authorities has begun inspections of six major local banks over virtual accounts offered to cryptocurrency exchanges including NongHyup Bank and Industrial Bank of Korea. Choi said, “We will focus on checking whether the six banks took a high level of measures that correspond to risks in transactions with cryptocurrency exchanges.”
The FSS and the Korea Financial Intelligence Unit (FIU) will launch a joint investigation on banks on whether they abided by obligations to detect money laundering and non-real-name transactions. To this end, they are planning to estimate how much risks there are for money laundering by cryptocurrency exchanges and whether banks properly carried out an inspection of exchanges. They will also check whether banks carried out their obligations to verify customers such as a source of capital on cryptocurrency exchanges and user information as well as to report suspicious transactions including an exchange of a large amount of cash.
The FSS and the FIU will also inspect the current conditions of real-name transaction system operation based on whether banks have established the computing system. In addition, the financial authorities will check cryptocurrency exchanges whether they have come up with and operate procedures of prohibiting transactions when users don’t provide information.
The authorities are planning to draw up guidelines on the prevention of money laundering related to digital currency and implement them by the end of next week. They will also supervise the real-name financial transaction system for virtual currency by the end of this month.