A Comprehensive Overview of the “Crypto Amendment”
March 5, 2020 marked a historic win for the industry as the South Korean National Assembly finally approved to partially amend the Act on Reporting and Use of Certain Financial Transaction Information (the “Amendment”), which many hail as the first legislative act to legitimize virtual assets (“VAs”) and virtual asset service providers (“VASPs”).  Since Park Yong-jin, a member of the National Policy Committee from the ruling Democratic Party, first attempted to introduce a bill to tax VAs back in 2017, it has taken three years to pass the National Assembly hurdle.
The Amendment implemented the Financial Action Task Force’s Guidance for a Risk-Based Approach to VAs and VASPs, especially Recommendation 15 that requires VASPs to be regulated for AML and CFT purposes. Accordingly, the Amendment addressed the following, which will be covered in more detail throughout the rest of the article:
- the legal terminology and definition of VAs and VASPs;
- the obligation on financial institutions to check whether or not VASPs have fulfilled their reporting duties and their ability to reject negative cases;
- the duty of VASPs to report to the Financial Intelligence Unit (the “FIU”), the failure of which will result in criminal punishment or a fine;
- the duty of VASPs to abide by AML requirements by maintaining documentation such as suspicious transaction report (“STR”), currency transaction report (“CTR”), customer due diligence (“CDD”), and enhanced due diligence (“EDD”). 
VAs and VASPs
While the Amendment reflects the substance of the FATF guidance, the Korean implementation entails nuances that are worth mentioning.
VA — FATF 
“digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes”
VA — Amendment* 
“digital representation (including any rights thereon) having economic value that can be traded or transferred electronically, except for the following:
- digital representation that cannot be exchanged for money, goods, services, etc. for which the issuer has restricted its use and purpose;
- tangible and intangible results obtained through the use of game products as defined in the Game Industry Promotion Act;
- electronic prepayment and electronic currency as defined in the Electronic Financial Transactions Act;
- electronically registered stock as defined in the Act on Electronic Registration of Stocks, Bonds, Etc.;
- electronic note as defined in the Issuance and Distribution of Electronic Bills Act;
- electronic bills of landing as defined in the Commercial Act;
- any other transaction as prescribed by the Presidential Decree by taking into account its form and characteristics.”
VASP — FATF 
“any natural or legal person…and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets;
- safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets;
- participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.”
VASP — Amendment* 
“anyone who engages in any of the business conducts involving VAs:
- selling or buying VAs;
- exchanging of VAs for other VAs;
- transferring of VAs as prescribed by the Presidential Decree;
- storing or managing VAs;
- brokering, mediating, or acting on behalf for (i) and (ii);
- other acts involving VAs that are likely to be used for money laundering and terrorist financing as prescribed by the Presidential Decree.”
*In considering the above comparative chart, please do note that the translation is a personal one that may differ from the official English version later on.
Both (i) digital representation without or limited utility as conceived by the issuer and (iii) electronic prepayment are excluded from VAs.
Here, it is worthwhile to note that the legal definition of “electronic prepayment” mandates that it “shall be used to purchase goods or services from a third person other than the issuer” , whereas the same mandate for the third party acceptance has not been taken into consideration in (i). In other words, what would happen to a digital representation that was originally designed by the issuer to have limited or no utility, but is then nevertheless accepted by a third party in exchange for goods or services? Should such freedom of the third party be curtailed as the result of defining what should and should not constitute VAs?
This will, of course, be of little to no commercial relevance, but the theoretical possibility does speak to the inconsistency, or perhaps the lack of due consideration, since the Amendment is to be read in conjunction with other existing legislative frameworks.
The exclusion of (ii) tangible and intangible results obtained through the use of game products from VAs is a puzzling one.
The obvious starting point is Article 32 (1) 7 of the Game Industry Promotion Act that prohibits “[m]aking a business of converting into money or intermediating such conversion or repurchase of tangible and intangible results obtained through the use of game products by anyone.”  These “results” or “game money” according to Article 18–3 (1) of the Enforcement Decree of the Game Industry Promotion Act are then further defined as “betting or allotment or acquired by some fortuity when using a game product.” 
Citing Article 18–3 of the Enforcement Decree, the Supreme Court in 2009 made a seminal ruling that Adena, the “game money” of Lineage developed by NCSoft, did not contravene Article 32 (1) 7 since there was significant time and effort spent in obtaining Adena exchanged for cash instead of having come upon it by “some fortuity.”  This clarification has ultimately contributed to the explosive growth of the virtual gaming items trade currently estimated at $1.3 billion in South Korea alone. 
Given the robust market, why would then the Amendment specifically exclude tangible and intangible results? The most likely legislative intent is to discourage gambling sites from using VAs due to their inherent consumer protection and money laundering issues. However, given the immense opportunity to capitalize on the major blockchain gaming trend in non-fungible tokens (“NFTs”) being developed by companies such as Axie and Sandbox, it would have been jurisdictionally more competitive had the language articulated on the market distinction established by the above precedent. After all, just as the right first movers could realize meaningful benefit in the emerging market of VAs, the first jurisdiction to receive them could also see new income streams previously unforeseen in its economy.
Another sinister possibility would be that in promoting the gaming industry, the exclusion was an intentional one to leave yet another grey zone for the gaming companies. If this is indeed the case, then the veiled discrimination for Korea’s favored industry sector would be unfair and short-sighted at best.
Duties of VASPs
VASPs, especially crypto exchanges, are now required to (i) utilize real-name verified accounts when transacting VAs, and (ii) obtain an information security management system (“ISMS”) certificate from the Korea Internet Security Agency (“KISA”).
As for the for the real-name verification requirement, the Amendment states as follows:
“The Financial Services Commission (“FSC”) shall consult closely with the National Assembly to ensure that the intent of the Amendment is properly conveyed in the process of drafting the corresponding Presidential Decree regarding the criteria and conditions for the opening and closing of the real-name verified accounts.” 
In other words, VASPs will have to wait for the more detailed conditions that would enable them to link real-name verified accounts provided by the financial institutions. At the moment, however, there are only four crypto exchanges — namely, Bithumb, Coinone, Korbit, and Upbit — that have contractual relationships with the banks, which are renewed on a six month basis. The concern here is two-fold: (i) whether the FSC will be able to propose an effective and practicable KYC criteria that would lower the barriers to entry for all VASPs and encourage outside players to join the industry, and (ii) whether the banks will insist on remaining as conservative as before as to extend their dominant position without letting in other competitors and beneficial disruptors.
These gaps leave room for jurisdictional variance that could result in South Korea losing its competitiveness. France, for example, has enacted the Plan d’Action pour la Croissance et la Transformation des Entreprises, also known as the Pacte Law, in May 2019. Relying on the new legislation, if the token issuers have satisfied a list of reasonable conditions and are then granted a working visa, they are legally entitled to a bank account with a French credit institution under the Pacte Law.  Given the clarity and practicality of the Pacte Law, it would not be surprising for business owners to opt for the French rather than the Korean option.
Regrettably, the second requirement is even more problematic. The said ISMS certification is a tedious and expensive process that many start-ups and new businesses cannot afford. According to a joint research paper published by Hexlant and Bae, Kim & Lee LLC, the process will take about 12~13 months and will cost around $200k until the final certification.  It is inevitable that the administrative and financial burden itself will be a major deterrent for business owners from either relocating or opening their businesses in Korea. Once again, the Amendment has failed to consider commercial elements that are fundamental for nurturing a new economy.
In addition to the two requirements mentioned above, VASPs have a preliminary reporting duty to declare their businesses to the FIU, the content of which is reserved for the Presidential Decree. What is clear, on the other hand, are the unreasonably strict sanctions.
The Amendment states that should VASPs fail to report, they are subject to either (i) not more than 5 years of imprisonment or by a fine not exceeding 50 million KRW for failing to declare or falsely declaring their VASP business, or (ii) not more than 3 years of imprisonment or by a fine not exceeding 30 million KRW for failing to declare or falsely declaring a VASP business change report.
For comparison, the severity of the 5 years or 50 million KRW sanction is matched by the same applied to those found guilty of introducing high-risk pathogens into the domestic environment without obtaining a permit according to Article 77 of the Infectious Disease Control and Prevention Act.  The inference is hard to miss that high-risk pathogen carriers and VASPs are similarly treated in the eyes of the law for assuming malicious intent in both agents. Such a juxtaposition is an unfair one since industry leaders have so far advocated for reasonable compliance in return for flexibility to carry out technological and commercial experiments that could ultimately benefit the Korean economy.
This is not to say that no sanction should be applied. Rather, it is a question of proportionality. FATF, for instance, clearly states that “countries should ensure that there is a range of effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative.”  France, for example, yet again provides a pertinent juxtaposition against Korea. According to Article L572–23 of the Code monétaire et financier, VASPs are subject to either (i) one year of imprisonment and a fine of €15,000 for failing to declare or falsely declaring, or (ii) two years of imprisonment and a fine of €30,000 for breaching one of the prohibited acts provided for in Article L54–10–4.  Considering the fact France has enacted a more favorable legislation in 2019 as opposed to 2020, the difference will inevitably have market consequences.
The overarching tone of criticism in this article is based on my personal lamentation that Korea has so far failed to lead this new industry like those of France and Singapore. At the same time, as the title of my article suggests, I maintain my optimism that the Amendment beacons a new beginning for Korea as it takes its first step to create a more hospitable environment for VAs and VASPs. In drafting the Presidential Decree to support the Amendment, regulators and lawmakers still have a chance to heed to the points articulated above and work out a fair solution by closely working with industry leaders such as Hashed, Korea Blockchain Association, Blockchain Law Association, and Korea Fintech Law Society. Until then, my resolve is to remain as vigilant and critical to assist Korea’s Morning Crypto.
GLOSSARY — Relevant Statutes of Korea
- Act on Electronic Registration of Stocks, Bonds, Etc. — Article 2 (Definitions) 4 “electronically registered stock”
- Commercial Act — Article 862 (Electronic Bills of Landing)
- Electronic Financial Transactions Act — Article 2 (Definitions)14 “electronic prepayment” and 15 “electronic currency”
- Game Industry Promotion Act — Article 32 (Prohibition of Distribution of Illegal Game Products, etc.): 1(7) Making a business of converting into money or intermediating such conversion or repurchase of tangible and intangible results (referring to game money prescribed by Presidential Decree and things similar thereto prescribed by Presidential Decree, such as score, premiums, and virtual currency used in game) obtained through the use of game products by anyone
- Issuance and Distribution of Electronic Bills Act — Article 2 (Definitions) 2 “electronic note”
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