[Insight] Release of Enforcement Decree Amendment of the Specified Financial Act, and the Fate of the Industry
The Financial Services Commission in Korea (FSC) has made an advance legislation notice of Amended Act on Reporting and Using Specified Financial Transaction Information (Specified Financial Act), drawing the attention of the industry. The Enforcement Decree is focused on specifying digital asset (cryptocurrency) business operators and the range of digital assets, and including the standards for issuance of real-name accounts for withdrawal and deposit and the Travel Rule, etc. The advance legislation notice will be made for 40 days, from November 3 to December 14.
Before the announcement, the industry was half-worried, but also half anticipating the Enforcement Decree. Some have forecasted that there will be nothing new for the Enforcement Decree, only partially specifying the clauses of the Amended Act on Reporting and Using Specified Financial Transaction Information. Others showed their expectation that there will be new provisions considering the difficulties of the industry. However, many of them are agreeing that the provisions are far from satisfactory. Then, what does the Enforcement Decree contain, and what are the things that the industry should pay attention to? Let’s take a look at them.
What are the Contents of the Amended Act on Reporting and Using Specified Financial Transaction Information?
First of all, the Enforcement Decree prescribed the scope of digital asset (cryptocurrency) business operators. Earlier, the Specified Financial Act designated the digital asset business operator as a person who operates a business related to digital assets, including selling, buying, exchanging, transferring, storing, managing, mediating, or acting as a broker. Instead of adding any further related acts, the Enforcement Decree decided to limit the scope of application to major digital asset business operators only. This includes digital asset dealers, digital asset custody providers, wallet service providers, etc. who are working for digital asset exchanges. However, P2P trading platforms that are only mediating transactions or wallet service providers providing platforms only are excluded from the scope of regulation.
As for the most controversial part, the standard for issuance of real-name accounts for withdrawal and deposit (real-name authenticated accounts), the Enforcement Decree specified the following five requirements for digital asset business operators:
① Customers’ deposits should be stored separately
② Should obtain an Information Security Management System (ISMS) certification
③ Operators must not be under the condition of non-acceptance of the report, such as less than 5-years have passed since the sentence or enforcement of the penalties that exceed the monetary penalty, or less than 5-years have passed since the accusation had been officially expired, etc.
④ According to Article 13.1, customers’ transaction history should be managed separately
⑤ According to Article 5.3.1, financial institutions, etc. should identify, analyze, and evaluate money laundering risks in financial transactions by checking the procedures and work guidelines, etc. implemented in order to prevent money laundering by digital asset business operators.
Furthermore, exceptions for the issuance of real-name accounts will be prescribed through the amendment of the notification by the Korea Financial Intelligence Unit (FIU). The obligations of reporting and anti-money laundering are essential, even if they are in exception.
Travel Rule to Be Applied… with One-Year Grace Period Before the Enforcement
The Travel Rule (meaning that the digital asset business operator responsible for transferring digital assets must provide transfer-related information to beneficiaries), which was considered as the most abstruse by the digital asset (cryptocurrency) operators, has also revealed its outlined. If digital assets are transferred between digital asset business operators, they must provide their business information. If a digital asset business operator is transferring the asset to an individual, the operator must identify the beneficiary. If the opposite case, the operator should request the beneficiary information from the individual. The transfer of digital assets between individuals is not subject to the Certain Transaction Specified Financial Act.
The base amount subject to the Travel Rule is KRW 1 million. As for the enforcement, the government decided that enough period for introducing the joint industry solution is required to implement the information sharing system between digital asset business operators, and giving the industry a one-year grace period. The Travel Rule will be effective from March 25, 2022.
What is the Government’s Stance Regarding the Enforcement Decree of the Specified Financial Act?
Then, does the enforcement of the Specified Financial Act and the Enforcement Decree means the institutionalization of digital assets (cryptocurrencies)? The government’s answer is “no.” The FSC said, “The Certain Transaction Act is just an act of imposing the anti-money laundering obligation (such as identifying customers and reporting suspicious transactions) on digital asset business operators according to the recommendation from the Financial Action Task Force (FATF). Systemizations, such as Permission or approval of the establishment under the system, regulations on capitals and business conduct, protection of investors, are not intended.”
As for the digital assets, FSC emphasized that they will enforce strong regulations for overheated speculations or illegal acts Furthermore, as for the Initial Coin Offering (ICO), they took the stance that they will keep the existing ‘de-facto principles of prohibition’ in order to protect investors. This means that they will keep their conservative attitude as they have been.
“Expected… but Frustrating”
Even the industry has already anticipated it for some degree, but the frustration still resides. The most disappointing part is the standard for issuance of real-name accounts. In Earlier days, digital asset (cryptocurrency) operators can request for the government to consider a plan that making banks to open accounts for operators if certain conditions proposed by governments are met. However, the government decided to stick to the traditional way of entrusting anti-money laundry financial firms and apply them to the digital asset industry. Thus, allowing Financial institutions such as banks to determine digital asset exchange’s money laundering risks and decide whether to open accounts or not at their whim. So, there is no actual change in contract structure between the bank and the digital asset exchanges. Since the banks have shown a conservative stance towards the opening of real-name accounts, it is still in question that they will change their attitude or not.
The government announced that at the early stage of the Specified Financial Act, they will apply the regulation on real-name accounts first to banks with distinguishing capabilities and skills in anti-money laundering and then gradually expanding it to other financial institutions. But, their ulterior motive is still in doubt.
Since the government keeps their focus on regulations only, the domestic digital asset market is facing a crisis and about to lose its competitiveness. The domestic firms that took the lead in the global market only a few years ago are pinned to the ground, complaining of the difficulties due to regulations. It seems the government should take heed and pay attention to the voice of the industry.
*This research and analysis document has been prepared for the purpose of providing information that can be used as a reference based on our reliable data and information, but we cannot guarantee its accuracy or completeness.
*The document has reflected the individual’s opinion and it may not be consistent with the company’s official point of view.