Growing market of cryptocurrencies have convinced South Korea to reconsider its crypto regulations. The plan to revise crypto policies became apparent when the government officials outlined flaws with the current regulations at the Deconomy conference in Seoul on the 4th and 5th of April.
Song Hee-Kyong, co-president of the 4th Industry Forum of the National Assembly, expressed his dismay that government had till now failed to understand virtual currencies which resulted in several problems. He disapproved the government’s approach of treating virtual currencies according to real currency standards. He said:
The industry does not stand still while waiting for the regulatory sandbox authorization, so it’s just like keeping it in the box.
The South Korean government has been promoting its regulatory sandbox for quite some time. Regulatory sandbox exempts businesses from some regulatory rules and gives them the freedom to test a product without worrying to comply with regulations laid by the government. This approach is usually implemented when a new concept, product or technology needs to be tested without compromising on interests, values and safety of the public. Song’s statement hints at immediate actions required to benefit from the growing industry of blockchain. Furthermore, the statement urges the South Korean government not to waste the prime opportunity by waiting for sandbox authorization.
The officials at the conference were of the view that the public has been safeguarded well previously by crypto regulations but now it’s time to freely allow blockchain to upgrade into a mega-trend industry. Won Hee-ryong, the governor of jeju Island, even proposed to operate a regulation agency at Jeju Island in order to develop a case study. He stated that this could expose the positive impacts of cryptography to the government.
According to current regulations in South Korea, cryptocurrencies are not considered as a legal tender and are not recognized by the country’s legal system as a mode of payment. As they don’t qualify as currency or financial assets, cryptocurrencies are tax-free at the moment. After putting initial coin offerings (ICOs) equivalent to gambling, South Korea banned ICOs in September 2018. The country reaffirmed its stance in January 2019 after findings of surveys conducted by Financial Services Commission (FSC) revealed that although firms launched ICOs abroad in other jurisdictions, they allowed participation by South Korean nationals.
The country has however laid down a set of rules and procedures for people interested in practicing crypto trade. South Korea has had strict crypto and blockchain policies in the past. All the traders and dealers involved in trades involving cryptocurrencies were asked to use their bank accounts. Cryptocurrency dealers needed to have contracts with banks before they could carry out trading whereas banks had to analyze dealers’ profile before granting them contracts.
Banks also scrutinized the identity of traders before opening bank accounts in their real names. Traders shared their account with dealers who later traced accounts and applied for registration of traders’ accounts with the banks to begin trading. Therefore, having accounts in the same bank was mandatory for dealers and traders buying and selling cryptocurrencies from each other. By ensuring the presence of banks in all crypto tradings, the South Korean government has bestowed an important role to them.
Banks are utilized to monitor, supervise and record all ongoing trade involving cryptocurrencies. This means crypto enthusiasts living in the country have limited options and control to practice crypto trade as centralized banks are empowered to maintain the activity of decentralized currencies.
Furthermore, due to the Act on Reporting and Using Specified Financial Transaction Information, Korea had prescribed financial institutions to report suspected transactions. The Korea Financial Intelligence Unit (KFIU) defined what suspected scenarios for crypto transactions were and prescribed banks to report immediately if those scenarios were noticed. Traders transacting 10 million South Korean won in a day or 20 million South Korean won in a week; making five or more transactions in a day or seven in a week and dividing amount of transaction money to deceive financial institutes were some of the scenarios that were must to be tracked by banks and reported to prevent money laundering via cryptocurrencies.
By doing so, South Korea aimed to check the activities of traders with the help of banks and use the recorded data to prevent money laundering and other illegal practices. That’s why registering with a bank before trading was made compulsory by the country. Although intended to prohibit illicit activities, registering in a common bank narrows down options for both, trader and dealer, and adds unnecessary complexity to an otherwise easy procedure of trading cryptocurrencies.
By introducing complexities, the current crypto regulations slow down the pace of mass adoption. It can be clearly seen that there remains plenty of room to support traders and dealers. Elimination of requirements for registering bank accounts, lifting ban on ICOs and special attention to crypto sandbox are a few of the areas to start with. Surprisingly, the officials claiming to improve regulations didn’t specify even one revision that would be made to the framework in the future.
Besides South Korea, the changing dynamics of the blockchain industry has been recognized by many other countries such as Malta and Switzerland. It would be interesting to observe what models and approaches these countries, aiming to modify their previous regulatory frameworks, end up with that can further result in each of them acquiring different level of success and failure.