The Financial Intelligence Unit of South Korea’s main finance sector regulator has launched an investigation of so-called honeycomb accounts held by virtual currency exchanges to track down accounts operated under false or third-party identities.
- Unlike the country’s “big four” exchanges — Upbit, Bithumb, Coinone and Korbit — many smaller crypto exchanges operate honeycomb accounts that receive funds directly through corporate bank accounts instead of individual, real-name accounts for clients.
- An increasing number of cases involving exchange accounts held in the names of fake affiliates or affiliated law firms has recently come to light.
- Amid mounting concerns over crypto-related fraud — such as continuing to solicit investor payments into accounts held under false or third-party names with no intention of repaying it — the FIU has taken a hands-on approach to prevention.
- The FIU’s investigation is targeting crypto exchanges by requiring the finance sector companies with which they operate to notify the regulator of the results of real-name account audits every month until September 24, when exchanges will have to comply with strict real-name account requirements.
- When real-name accounts are used, only one or two banks contracted by a crypto exchange can be used by its customers, and when a deposit is made through an account at one of those banks, the funds are stored separately from those in the exchange’s corporate account. The exchange cannot access the funds, and cannot block withdrawals.
- However, when honeycomb accounts are operated under an exchange’s corporate account, the customer’s funds are deposited directly into the corporate account, allowing the exchange to withdraw customers’ funds, transfer those funds, and block withdrawals.
- Even though money in a honeycomb account is deposited by investors, those investors may not be able to withdraw their funds. If an exchange embezzles funds or goes bankrupt, investors risk of losing all of their deposits.