Virtual Currency – Korean Regulatory and Legislative Developments
Korean Virtual Currency Market Overview
The proliferation of virtual currencies in South Korea has resulted in a highly volatile environment for speculative and unregulated trading on the Korean virtual currency exchanges. The Korean virtual currency market remains desirable to issuers of initial coin offerings (“ICOs”), due in large part to Korea’s advanced e-commerce, online banking and P2P infrastructure being readily suited to the adaptation of blockchain technologies.
In recent months, the Korean government has shown growing interest in, and concern about, the widespread availability, sale and use of virtual currencies in Korea, particularly with regards to the potential for fraudulent or illegal activities, and the increasingly speculative nature of the Korean virtual currency market. In response, several Korean regulatory bodies including the Financial Services Commission (the “FSC”), the Financial Supervisory Service (the “FSS”) have issued proposals, guidance and directives in an attempt to formulate a regulatory response to the growing Korean virtual currency market.
Financial Regulations
Current Status
A. Korea's virtual currency exchanges
The Korean government has yet to implement “know your customer” (“KYC”) or anti-money laundering (“AML”) regulations to govern the sale and use of virtual currencies in Korea. There are currently no regulations governing virtual currency exchanges in Korea, and for the time being, such exchanges do not need to be licensed or registered.
Until such time as the compulsory KYC and AML regulations are implemented, the Korean government has issued recommendations to the commercial banks to strengthen their KYC and AML process relating to virtual currency transactions. Furthermore, the banking institutions with which the Korean virtual currency exchanges maintain accounts have been issued recommendations to confirm the adequacy of internal control systems of such virtual currency exchanges and ensure that such systems provide reliable information for KYC and AML purposes. The implementation of such recommendations is expected to occur by the end of 2017.
B. Limitations on ICOs
Public offerings of securities in Korea must comply with the regulations set forth in the Financial Investment Services and Capital Markets Act (the “FISCMA”), which may include the preparation and submission of a securities registration statement. In the context of an ICO or the sale of virtual currencies in Korea, careful consideration must be given to whether such virtual currencies constitute a “financial investment instrument” and a “security”, each as defined in the FISCMA. Issuers of virtual currencies must take care not to engage in any unauthorized public offering or solicitation activities in Korea absent a corresponding registration under the FISCMA.
For your reference, the FSS and The Bank of Korea have issued guidance earlier this year strictly limiting the overseas remittance of fiat currency in relation to a purchase or sale of virtual currencies. Consequently, Korean residents intending to wire funds to an overseas issuer or seller of virtual currency in the context of an ICO or secondary trade of virtual currency will likely be unable to find a foreign exchange bank willing to process such wire transfers.
Pending Regulatory and Legislative Matters
A. FSC proposals
The FSC announced a plan to propose amendments to existing legislation that would impose KYC and AML requirements directly on Korean virtual currency service providers, including virtual currency exchanges. However, it is unclear whether and when such amendments will obtain the necessary approval of the Korean National Assembly.
The FSC has also signaled its intention to enact new legislation that would impose certain obligations, such as adequate disclosure requirements and prohibition on virtual currency price manipulation, on virtual currency service providers including virtual currency exchanges.
In the second half of 2017, it is expected that the FSC and the FSS will lead the adoption by Korea’s virtual currency exchanges of certain voluntary regulatory measures to provide greater investor protection and additional control and oversight of transactions involving virtual currencies. Examples of such measures include (i) segregation of customer funds from that of the exchange, (ii) system upgrades and improvements and (iii) enhanced security infrastructure including cryptographic key.
B. Other legislative proposals
Korean regulators are also considering a diverse range of other legislative proposals including a registration or license requirement for virtual currency exchanges and taxation of transactions involving virtual currencies. Currently, however, the regulators’ position appears to be to observe developments in other foreign jurisdictions prior to formulating any comprehensive regulatory regime for implementation in Korea.
Criminal Regulations
The use of virtual currencies to facilitate criminal activities, including for fraudulent purposes, may result in the imposition of criminal penalties ranging from imprisonment to monetary penalties. In anticipation of further regulation and legislation on virtual currencies in Korea, the scope of criminal violations and breadth of their enforcement may increase in the future.
Concluding Remarks
The Korean virtual currency market is expected to gradually mature over the next several months as Korean regulators grapple with the extent of regulations to impose. Despite the current unregulated nature of the market, any potential involvement with virtual currencies in Korea should be carefully devised and monitored in consideration of pending legislative and regulatory actions.
