South Korea’s decree that virtual asset service providers (VASPs) comply with a new crypto travel rule starting Friday could leave digital asset investors in trouble as exchanges scramble to implement their own solutions, experts say. 

The guidelines were introduced by the Financial Action Task Force (FATF), on which South Korea’s rules are based. Recommendations by the independent and global inter-government organization are recognized as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.

FATF guidelines require digital asset companies to collect and disclose sender and receiver information above a certain financial threshold. South Korea took a step further to legally mandate FATF guidelines to all transactions over a million Korean won (US$820 at current exchange rates) on March 25 last year, giving companies a one-year year grace period to comply with the law.

Companies, including crypto exchanges, have flexibility in implementing the travel rule, a representative of the Korea Financial Intelligence Unit (FIU) told Forkast. The rule only regulates transactions among individuals, with no regulation governing the movement of funds into a personal wallet, the representative added.

“Skilled investors will understand what’s happening with each exchange, but there are a lot more who do not,” Paik Hoon-jong, chief operating officer of digital asset banking platform Sandbank, told Forkast. Most of South Korea’s 5.5 million crypto investors were left confused due to the lack of clear regulatory guidance, he added. “At the end of the day, the investors take on the damage,” he said. 

And though the rule could hurt investments in decentralized finance (DeFi) and non-fungible tokens (NFTs) to some level as a personal wallet is required, it is unlikely to have a major long-term impact on the market, Paik said.

During the one-year grace period, local crypto companies have been scrambling to comply with the heightened anti-money laundering requirements. However, the flexibility granted by the authorities has resulted in each exchange announcing varying requirements, leaving investors using multiple investing platforms in limbo.

For example, while Upbit opened up transactions to MetaMask with plans to extend access to foreign exchanges in the near future, Korbit will allow MetaMask after auditing the user. Bithumb applied the travel rule limits to all transaction amounts.

Dunamu, the operator of Korea’s largest crypto exchange Upbit, established a travel rule solution system named VerifyVASP. Smaller rival exchanges Bithumb, Coinone and Korbit worked together to build another solution system named CODE.

But with the two systems yet to establish a link, Upbit users can’t transfer crypto to exchanges under CODE and vice versa until next month.

On top of that, access to personal e-wallets or foreign exchanges are largely curtailed as the rule has yet to be imposed in most countries.

Industry experts feel South Korean regulators could have improved upon enforcing the rule by specifying the implementation of the guidelines. Nonetheless, they are convinced that it will do more good for the local crypto industry in the long haul.

“In 1993, Korea started the real-name financial system,” Hwang Suk-jin, professor of information security at Dongguk University, told Forkast. The real-name financial system bans financial transactions under incognito names or anonymity.

“It helped uncover the underground economy and effectively prevented slush funds or illegal funds from forming,” Hwang said. “Perhaps you can look at the travel rule as a crypto version of the real-name system.” 

But beyond the short-term adjustment lies a move in the right direction, reflecting South Korea’s maturity as one of the world’s most mature digital asset markets, industry observers agreed.

“The users in DeFi aren’t just people making small money out of crypto,” Paik said. “Most of them are active investors. Of course, [the travel rule] adds inconvenience, but won’t affect their [investments] greatly.” 

“The travel rule will be the first step in protecting investors and in building a healthy virtual asset market,” Dongguk University’s Hwang said. “The biggest danger in crypto right now is anonymity,” he added. “It was almost impossible to track illegal funds or tax evasion.”