RegWatch: South Korea’s Act on Reporting and Using Specified Financial Transaction Information Amendment Now Applies to VASPs
An Overview by OhKims Law & Company l 법무법인 오킴스
Merkle Science’s RegWatch provides expert commentary on the impact of recent regulatory developments from our partners. This article has been contributed by OhKims Law & Company, a law firm with a strong specialism in blockchain technology based in Seoul, South Korea.
Main points of the amendment to the “Act on Reporting and Using Specified Financial Transaction Information.”
On March 5, 2020, the amendment to the “Act on Reporting and Using Specified Financial Transaction Information” (hereinafter referred to as the “Specified Financial Transaction Act”) was ratified in the plenary session of the National Assembly of the Republic of Korea. This amendment imposes obligations to prevent money laundering by Virtual Asset Service Providers (VASPs) and prescribes obligations with regards to financial transactions from VASPs to financial institutions.
It can be said that the amendment to the Specified Financial Transaction Act will make virtual assets, including cryptocurrency, fall under the traditional regulatory system and be managed by financial authorities. On the one hand, however, strict regulations are expected across virtual asset-related businesses such as cryptocurrency exchanges, ICO projects, and cryptocurrency wallet providers. In particular, as the Specified Financial Transaction Act stipulates that the scope covering VASPs shall be defined in the Enforcement Decree, which is scheduled for enactment in the future. So, depending on the scope defined the applicability of the Specified Financial Transaction Act to each VASP varies. Therefore, VASPs operating in South Korea should also consider the direction of the Enforcement Decree very carefully.
Effective date and further procedures
The amendment to the Specified Financial Transaction Act is expected to be implemented one (1) year after its promulgation, which is March 2021. Existing VASPs must report to the Korea Financial Intelligence Unit (KoFIU) within six (6) months of the amendment’s effective date.
The main details of the amendment are delegated to the enforcement ordinances organized by the Financial Services Commission (FSC), so it is expected that the regulations will be clearly understood after the ordinances are prepared.
Essential Particulars of the Amendment
- Scope of Virtual Asset Service Providers (VASPs)
- Scope of Virtual Assets
- Reporting requirements of VASPs
- Details of the consignment of the reporting
- Standards, conditions, and procedures for financial companies to open a Real Name Verifiable Account for VASPs
Main contents of the amendment to the Specified Financial Transaction Act
In the amendments, definitions were made for ‘ Virtual Asset ‘ and ‘ Virtual Asset Service Providers’. The term “Virtual assets” refers to electronic vouchers of value that can be traded or transferred electronically, and ‘A person who conducts transactions related to value-added assets such as:
- Selling and buying
- Exchange with other virtual assets
- Transfers
- Storage or management
- Brokerage, mediation of selling or exchanging Virtual Assets,
or
- any other acts prescribed in a Presidential Decree which is defined as a Virtual Asset Service Provider.
Therefore, the Specified Financial Transaction Act applies to virtually all operators of the virtual asset industry, such as virtual asset exchanges, wallet providers, custody service providers, and professional traders.
According to the amendment, VASPs must report to KoFIU in order to run a virtual asset business, and if a VASP fails to meet the requirements such as to obtain an Information Security Management System (“ISMS”) certification and the capacity to provide a Real Name Verifiable Account Services (real name virtual asset transaction system) under the Specified Financial Transaction Act, its report may be rejected. In that the report is accepted only if a VASP meets the requirements, it may be considered as a permission system.
Furthermore, financial companies may refuse financial transactions when they determine that the risk of money laundering is particularly high for a certain VASP.
Possible Issues for VASPs Operating in South Korea
According to the amendment, there are several issues that can lead to controversy.
1) Real Name Verifiable Accounts
Verifiable Real Name Account Services are currently provided at the sole discretion of a bank. As a result, the service cannot be provided except to the four large exchanges. Small and medium-sized exchanges use deposit and withdrawal accounts only through so-called “honeycomb accounts”.
However, as the Specified Financial Transaction Act requires the provision of Real Name Verifiable Account Services, it is a legal obligation to establish such a service, and it is virtually impossible to fulfill such obligation for a VASP that is now insufficient in the capacity and scale for issuing a Real Name Verifiable Account.
In addition, the definition of VASP under the Specified Financial Transaction Act encompasses most cryptocurrency service providers including but not limited to exchanges, wallet service providers, custody providers, traders, and ICO projects. However, if cryptocurrency wallets, studies, ICOs, etc., which are services that do not require the deposit of Korean Won, are also required to have a Real Name Verifiable Account, it is not only excessive regulations irrelevant to the service, but also may be interpreted as virtually prohibiting cryptocurrency businesses as the banks provide such services to only a very small number of VASPs.
Therefore, as a VASP, it is necessary to carefully review the enforcement decree of the Financial Services Commission to be enacted in the future to check whether it imposes to have a Real Name Verifiable Account.
2) ISMS certification
VASPs who cannot afford to spend on ISMS certification are expected to have difficulty maintaining their business.
ISMS certification takes about one year to acquire, and the cost of construction and management is hundreds of millions of won. This can be a major hurdle for VASPs of a size that cannot afford these expenses.
As it is significant that laws and regulations with regard to virtual assets develop the domestic cryptocurrency industry, responses to such laws and regulations have become more and more important. VASPs must take measures for a professional preliminary review before the Specified Financial Transaction Act goes into effect, so they can prepare their business smoothly.
How Can Merkle Science Help South Korean VASPs?
- Detect and prevent the risks of money laundering through cryptocurrency address and transaction screening and suspicious activity monitoring provided by our comprehensive risk assessment platform.
- Demonstrate to South Korean banks (needed to enable real name verifiable accounts) that proactive transaction monitoring is being conducted to prevent money laundering by providing access to cryptocurrency risk activity reports.
- Conduct thorough due diligence on other VASPs as part of institutional client onboarding through our detailed “Know Your Blockchain Business” reports, which provides a macro-level risk score of a VASP based on their known cryptocurrency transaction history.
- Provide easy collaboration with South Korean law enforcement agencies to investigate suspicious activity by commissioning our Enhanced Due Diligence reports, in-depth investigations into a specific cryptocurrency transaction or addresses compiled by our data intelligence team.
For more information about how Merkle Science can help your VASP meet anti-money laundering requirements in South Korea contact us at korea@merklescience.com.
For any questions regarding the amendments mentioned above and other legal requirements for VASPs in South Korea please contact Ohoon Kwon (ohkwon@ohkimslaw.com), Chaeseung Lee (cslee@ohkimslaw.com) or Sujung Kim (sjkim@ohkimslaw.com).
About OhKims Law & Company
OhKims Law & Company provides comprehensive legal advice to enable your business by in-depth research and a professional level of understanding and know-how to handle domestic and international regulations. If you need to receive assistance from legal experts regarding the virtual asset business, please do not hesitate to contact us through the contact information below.
Disclaimers:
This publication is general in nature and is not intended to constitute legal or investment advice. You should seek independent professional advice before taking any action in relation to the matters dealt with in this publication.
This article is not endorsed by any government body from the Republic of Korea (South Korea).
