The Financial Action Task Force (FATF) urged the financial authorities of the member states to regulate cryptocurrency exchanges in the same manner they regulate commercial banks in order to prevent cryptocurrencies from being misused for illegal transactions. This has put nearly 200 South Korean cryptocurrency exchanges on alert. Considering the fact that only a small portion of the nation’s cryptocurrency exchanges, such as Bithumb, Upbit, Coinone and Korbit, use real-name accounts issued by banks, the remaining hundreds of cryptocurrency exchanges will be kicked out at the worst if they do not establish a strengthened anti-money laundering system.
The FATF is planning to confirm its recommendations to impose anti-money laundering obligations on not only cryptocurrency exchanges but also cryptocurrency dealing companies at the existing bank level in the near future and adopt them as the FATF standards, according to industry sources on June 21. The key recommendation requires cryptocurrency exchanges to provide information about remitters and receivers to financial authorities when they send and receive more than US$1,000 (1.16 million won). Moreover, exchanges need to obtain a license or make registration to authorities. As Deputy Prime Minister and Finance Minister Hong Nam-ki agreed to actively implement the exchange management and supervision plans from the FATF’s financial recommendations at a recent meeting of central bank governors and finance ministers of the G20 countries, South Korean cryptocurrency exchanges are also expected to be affected by the FATF’s recommendations.
With the trend, Korean financial authorities are planning to revise the Act on Specified Financial Transaction Information in the second half of this year to strengthen cryptocurrency exchanges’ duty of money laundering prevention. A revision bill which requires cryptocurrency exchanges to report their company names and CEO names to the financial intelligence unit (FIU) has been submitted to the National Assembly.
If the revised bill is passed in a plenary session, it will form the legal basis on which the government refuses to register cryptocurrency exchanges that do not use real name accounts. Accordingly, exchanges other than Bithumb, Upbit, Coinone and Korbit will be defined as unregistered exchanges and face up to five years in prison and a maximum 50 million won (US$42,975) in fines.
In particular, the financial regulator is planning to add the FATF’s recommendations in the amendment bill on Specified Financial Transaction Information. Therefore, cryptocurrency exchanges which have lax anti-money laundering systems are unlikely to survive. A senior official from a large South Korean exchange said, “Small and mid-sized cryptocurrency exchanges show a significantly lower capital transparency because they cannot be issued real name accounts by commercial banks. They have no reason to build the anti-money laundering system that meets the standards of the FATF by spending a huge amount of money.”
Some experts say that stronger regulations on money laundering prevention driven by the FATF will move up restructuring of cryptocurrency exchanges at home and abroad. During a meeting hosted by the Korea Blockchain Association (KBA) on June 21, Kim Jin-hee, the law-abiding monitor in the Asia Pacific region at the Bank of Tokyo-Mitsubishi UFJ, said, “It is impossible to understand information about cryptocurrency receivers with blockchain technology alone so there are a lot of concerns that it will be difficult to abide by the FATF’s recommendations. Ultimately, it will be necessary for cryptocurrency exchanges to set up international payments networks that are used in international wire transfers, like SWIFT at banks.” The address of cryptocurrency wallets is generally anonymous so it is impossible to confirm receivers at exchanges. Therefore, the new payment system needs to be established to prepare for regulations on anti-money laundering. Then, the cryptocurrency market will be hit as cryptocurrency transactions will go through the same remittance process with existing commercial banks.
Domestic cryptocurrency exchanges, which felt the sense of crisis, are planning to take collective action. The KBA which consists of cryptocurrency exchanges is said to be sending a letter saying that the FATF’s recommendations are excessive to the FAFT at the G20 summit to be held in Osaka, Japan, at the end of this month. Jeon Ha-jin, chairman of the KBA’s self-regulatory committee, said, “If the message (related to cryptocurrency) is delivered at the G20 summit, governments across the world will work on making cryptocurrency regulations. South Korea was at the center of the cryptocurrency market but it’s a pity it plunked down after the government neglected the market.”