South Korea has historically been a crypto hotspot. The crypto-boom first struck the country widely in 2017 and in just a matter of a few years, around 10% of the nation’s population had invested in the asset class. Now, South Korea is touted as one of the top 5 largest crypto markets in the world with the country’s crypto exchanges accounting for almost 9% of global trade by volume in August 2021.
The daily crypto-trading volume of South Korea increased more than twelve times in April 2021 as compared to 2020, surpassing the daily volume of the national stock markets. However, due to one of the strictest licensing and operating regimes in the world, only a handful of Virtual Asset Service Providers (VASPs) exist and dominate the crypto-market in the country.
Classification of Crypto and Are They Legal to Own and Trade in South Korea?
It is legal to own, sell and buy crypto assets in South Korea. Crypto assets have not been legalised as official tender by the South Korean government.
South Korean Crypto Regulatory Authorities
For examination of compliance and enforcement of Anti-Money Laundering requirements, the Korea Financial Intelligence Unit (KoFIU), established under the Financial Services Commission (FSC) is the apex government authority responsible. Additionally, the Supreme Prosecutors’ Office possesses the exclusive right to conduct criminal investigations and prosecution of AML-related offences.
For investigating and prosecuting criminal money laundering offences in South Korea, two authorities namely ‘The Prosecution Service’ and the ‘Korean National Police Service’ are responsible. In 2018, to strengthen its ability to identify and recover criminal proceedings, particularly in high-profile corruption and money laundering cases, The Prosecution Service set up the Criminal Asset Recovery Division (CAR).
In relation to crypto tax offences, the National Tax Service is the primary authority responsible for enforcement.
In addition, although not a crypto regulatory body as such, it is notable that the South Korean central bank, the Bank of Korea, has conducted extensive research and testing into a Central Bank Digital Currency (CBDC) Won. At the end of January, the bank announced the conclusion of the first ‘phase’ of the endeavour.
South Korea VASP Licencing Regulations
In 2018, the South Korean watchdog FSC tightened the rules on crypto-exchange bank accounts. The new set of regulations permit crypto-trade only with “real-name bank accounts”. To simplify, this means that according to the new rules, a customer (trader) should have a bank account in their real name at the same bank as their cryptocurrency dealer in order to extract or deposit funds from their e-wallet. In addition to this, the bank as well as the dealer must verify the identity of the trader under the pre-existing AML/CFT regulations plus structured transactions reporting regulations (similar in nature to the so-called ‘Travel Rule’). However, the problem is that there are no legal standards which direct the issuance of verifiable “real-name bank accounts”. This means that only banks have the ultimate right of evaluating an individual VASP’s risks and issuing a verifiable account under their real-name.
The South Korean government passed an amendment on 5th March 2020 to the existing AML/CFT regulations. The traditional AML/CFT regulations extended to all South Korean exchanges under which all VASPs or Virtual Asset Service Providers/crypto service providers/firms needed to obtain an operating licence from FSC’s Financial Intelligence Unit. The KFIU is the FSC’s Financial Intelligence Unit for anti-money laundering concerns.
How are VASPs Identified in South Korea?
A VASP can be defined as an entity that engages in any of the following businesses:
- Sale or purchase of Virtual Assets
- Interchange of one Virtual Asset with any other asset
- Transfer of Virtual Assets for the purpose of transaction, exchange, storage, etc. upon customers’ request
- Storage or management of Virtual Assets
- Acting as an agent, or providing brokering or intermediating services related to the sale or purchase of VAs and interchange of one VA with any other asset.
The new law primarily affects VASPs involved in:
- Trading cryptocurrencies
- Crypto-to-crypto exchanges
- Cryptocurrency transfers
- Storage and management of virtual assets
Here’s a checklist of some requirements VASPs need to comply with under regulations:
- They have to register a government recognized company bank account. Besides, they will have to provide customers with bank accounts under their own, real name, at the same bank.
- They must now utilise a Risk-Based Approach including Customer Due Diligence and suspicious transaction reporting, implementing the revised AML/KYC procedures as per amendments made in March 2020. In addition, they shall also be bound to develop a technology allowing the exchange of customers’ private data with the trading counterparties.
- Unlike before, the businesses would now also need to acquire an ISMS (Information Security Management System) certificate from the KISA (Korea Internet and Security Agency).
- To enhance transparency and tracking, companies must now furnish their identity details such as company name, name of its representative, contact information, address of the place of business and bank details to FSC’s Financial Intelligence Unit.
South Korea Crypto Anti-Money Laundering (AML) Laws
As per the South Korean legislation, criminal money laundering (ML) offences are described under the following 2 articles:
- Article 3 of the Act on Regulation and Punishment of Criminal Proceeds Concealment (Criminal Proceeds Act) covers those that are-
- “Disguising the acquisition or disposition of criminal proceeds; “
- “Disguising the origin of criminal proceeds; “
- “Preparing, conspiring or attempting to do all of the above.”
- Article 7 of the Act on Special Cases Concerning the Prevention of Illegal Trafficking in Narcotics (Narcotics Trafficking Act):
- “Concealing or disguising the nature, location, origin, or ownership of illegal profits for the purpose of hindering the detection of narcotics crimes/ investigation of the origin of illegal profits, or avoiding the confiscation of illegal profits.”
- “Preparing, conspiring or attempting to do all of the above.”
In 2001, South Korea initially listed 38 money laundering predicate offences. Since then, the government has continued to expand the scope of the listed offences and have included activities such as currency counterfeiting, terrorist financing, copyright infringement, breach of trust, fraud and bribery. Although evasion of tax is also enlisted as a ML predicate offence, the Financial Action Task Force (FATF) in its Mutual Evaluation Report of April 2020 noted that the country’s predicate offence framework covers only a small area of tax offences, which prevents the pursuit of money laundering related to tax crime.
Under the Criminal Proceeds Act, a person found guilty of committing the prescribed offences shall be subject to imprisonment for a maximum duration of five years or a maximum criminal fine of 30 million Korean Won (around USD 26,000). Likewise, the Criminal Proceeds Act also facilitates forfeiture and confiscation of criminal proceeds or assets of the same value. When it comes to ML offences, authorities have the right to confiscate any of the following assets under Art 8 of the Criminal Proceeds Act:
(i) criminal assets related to a ML offence;
(ii) any property acquired as a result of or as compensation for such criminal acts, or any other property acquired from possessing or selling of such criminal proceeds;
(iii) any property created by or acquired in exchange of committing a Money-Laundering offence;
(iv) any property resultantly acquired as compensation for any of the properties mentioned in (i)–(iii),
(v) any property acquired as compensation for such property, or any other property acquired by holding or disposing of any of the properties set forth in (i)–(iii); and (v)
(vi) where the property under confiscation is associated with other properties, the equivalent value or the quantity of the property under investigation may be confiscated. Such property shall be confiscated unless it does not belong to any bona fide third party, who may have unknowingly acquired such property.
Under South Korean law, confiscation or forfeiture is premised on criminal conviction. Besides, there is no provision for non-criminal confiscation or civil forfeiture in the country.
AML Regulatory Requirements and Implementation
Crypto legislations have made AML/CTF requirements mandatory for South Korean VASPs with crypto businesses not adhering to the regime facing tough regulatory sanctions. The primary legal authorities for enforcing anti-money laundering (AML) and counter-terrorist financing (CTF) regulations on financial companies in South Korea are:
(i) the Act on Reporting and Using Specified Financial Transaction Information (FTRA);
(ii) the Act on Prohibition against the Financing of Terrorism and Proliferation of Weapons of Mass Destruction (Terrorist Financing Act);
(iii) the Criminal Proceeds Act;
(iv) the Narcotics Trafficking Act.
The term “financial companies” here, refers to traditional financial institutions and casinos, amongst others defined by the FTRA. As per amendments to the FTRA in 2020, the definition’s scope includes virtual asset service providers (VASPs) such as crypto exchanges.
Under these legal regulations, financial companies have to:
(i) carry out customer due diligence (CDD), in accordance with the FTRA, which includes identifying and verifying customers’ information for financial transactions;
(ii) file a suspicious transaction report (STR), as per the FTRA, in case there are sufficient reasons to believe that any asset received or paid as part of a financial transaction represents an illegal asset, or the counterparty of the financial transaction has committed a ML/TF offence;
(iii) file a currency transaction report (CTR) for financial transactions involving cash or a cash equivalent above KRW 20 million, which is the current threshold amount for filing a CTR, in accordance with the FTRA.
While the new regulations were kicked into force in March 2021, the South Korean crypto providers were given a deadline of September 2021 to comply with them. In case the company does not have an authorised bank account, the owners can be handed a 5-year prison sentence or a 50 million Korean Won fine (USD 42,000).
Other South Korean Crypto VASP Regulations
- The offering of margin trading of crypto assets is against the law, due to the extreme volatility that some crypto assets can experience.
- Issuing ICOs (Initial Coin Offerings) are banned by domestic companies and individuals in South Korea.
Crypto Tax in South Korea
In November 2021, the finance committee of the South Korean National Assembly approved to defer a 20% tax to be levied on crypto profits of more than 2.5 million Korean Won (USD 2,105), until 2023. The South Korean government initially intended to implement the crypto tax in 2017 when the authorities attempted to curb the hype around digital assets. Excessive speculation, money laundering, tax evasion and fraud were some of the government’s cited concerns.
The tax rates for crypto-assets in South Korea will be different from traditional financial securities (as crypto has not been recognised yet as a form of financial asset). The first 50 million Won annually will be exempt from the tax regime, however, taxes on most profits in stock exchange will be from 20 to 25 percent.
National Tax Service or NTS, South Korea’s primary tax authority, announced that starting January 1, 2022, citizens will be obliged to pay tax on any crypto-assets either received as gifts or inherited, whether from family members, friends or acquaintances, in a bid to close the tax loopholes. The latest amendment will be implemented as per schedule despite the fact that the South Korean National Assembly has imposed a tax delay on crypto-trading profits. Courtesy of the pushback, investors will now be able to trade tax-free for at least another year, when the proposal is enforced in 2023. One noteworthy observation is that any sort of tax on such digital transactions will only be imposed when the gains made from crypto-trading surpass 2.5 billion Won, or around USD 2,300. Any profits earned up to this value will be exempt from taxing.
The NTS, in a bid to help citizens abide by the new tax regulations on crypto gifts and inherited tokens, announced that it will be adding a new widget on its website. This tool will allow the taxpayers to calculate the amount they owe to the IRS authorities when they receive a crypto-windfall. To calculate the fiat value of a token donation i.e., in terms of legal or government currency, the widget will use the data on token prices provided by the “top four” crypto exchanges. The catch, however, is that instead of considering crypto prices at the time of token receipt or inheritance, individuals will be compelled to calculate a two-month average rate using the widget. This obligation by the NTS is due to their concern around the volatility of the token prices, to deter malintent investors from creating gifts when the prices fall to avoid hefty tax bills. Even though there is no clarification from the authorities yet on the time period that would fall under these two-month average prices, most likely it is going to cover 1 month before as well as after the receipt of the gift or token.
According to a new guidebook issued by the Ministry of Economy and Finance, any resident or domestic company with crypto assets worth up to and in excess of WON 500 million (~USD 420,000) on any day of the past 12 months must declare as such to the NTS between June 1 to June 30 2023.
Taxes must be paid in fiat currency (unlike in Switzerland).
South Korea Crypto Regulatory Action Examples
South Korean authorities are quick to act against those that break their laws, with law enforcement putting a number of people behind bars for a variety of illegal schemes.
In April 2018, the CEO of crypto exchange Coinnest was arrested and charged with embezzlement and fraud – with prosecutors believing executives at the firm had syphoned customer’s funds into their wallets – following a raid against three crypto exchanges. The following year, Coinnest announced it was ceasing operations.
The ‘land of morning calm’ became a raging inferno in September 2021 when authorities confiscated around $5 million worth of crypto assets from 1,661 companies and individuals who had not paid taxes on their crypto holdings and were allegedly looking to hide their assets. The crackdown took place in the province of Gyeonggi which is the most populous province in the country.
Just a few months before that seizure, in June 2021, some $47 million worth of crypto-assets were seized from around 12,000 people in the same region of Gyeonggi. Among the owners were many HNIs or high net worth individuals of South Korea, all of who tried to evade the ownership charges of their assets.
Just the next month, South Korean authorities announced the arrest of 33 individuals involved in USD 1.5 billion of sales at a premium price – the ‘Kimchi Premium’ is a phenomenon whereby crypto assets trade in South Korea at a higher rate of between 5-22% – and the profits transferred abroad. South Korean officials cited the Foreign Exchange Transactions Act as the law being breached (where remittances of USD 5,000 must be made with correct documentary evidence explaining their purpose). It was alleged the cartel made false reports to take advantage of the arbitrage opportunity.
For AML/CFT crypto-asset compliance for your obliged entity contact Coinfirm today.
