South Koreans were early advocates of cryptocurrency — the first Bitcoin exchange launch dates back to July 2013. They have been passionate investors, with a nationwide crypto fever gripping the peninsula multiple times.
More and more South Korean investors, including younger ones looking to keep up with living costs, took a keen interest in the bullish crypto market, and on Sept. 8, the total transaction amount of cryptocurrencies in Korea had surpassed that of KOSPI, the domestic stock market.
Kimchi premium, a term that stands for the higher prices commanded by cryptocurrencies like Bitcoin in the Korean market over prices in foreign markets, made a comeback in April since the initial coin offering (ICO) boom in 2017. At one point, South Korean investors saw the domestic Bitcoin price rise above US$70,000, which was 21% higher than the rest of the world.
Bitcoin and cryptocurrency investment know-how used to dominate the headlines in Korea; now it is all about the government crackdown on the industry.
Taxing crypto and the backlash
Beginning in late 2020, Korean authorities pushed through an initiative to begin taxing crypto trading profits. On Jan. 6, an amended Income Tax Law was announced that called for taxing crypto income beginning in 2022. The amended law will tax 20% of profit from crypto transactions over the amount of 2.5 million Korean won, or about US$2,200. Korea’s National Tax Service (NTS) has since expanded the crypto tax law on accounts by domestic investors to foreign crypto exchanges and businesses.
Backlash from crypto investors came swiftly. Many argued it was unfair, as crypto income is to be taxed over 2.5 million won, while stock capital gains are to be taxed from 50 million won, which is around US$42,400. Moreover, stock capital gains are to be taxed from 2023, a year later than crypto taxation.
The issue at hand is the categorization of virtual assets. Right now, virtual assets are categorized under “other income,” which includes for example gains from trading in art. The government said there are special tax benefits to income from certain financial investments, and virtual assets aren’t categorized as financial assets in South Korea — hence the lower threshold for tax deduction.
Industry members and some lawmakers insist the crypto tax should be deferred for one to two years until crypto is clearly defined. Conservative party lawmakers Yun Chang-hyun and Yoo Gyeong-joon proposed bills to delay the tax while democratic party lawmaker Noh Woong-rae proposed characterizing crypto capital gains as income from financial investment.
Hong Nam-ki, South Korea’s finance minister, spoke on this matter at the National Assembly on Sept. 15, where he ruled out any possibilities of delaying the crypto tax. Hong said tax is due where there is income, and delaying the tax would only cause market confusion.
The Blue House petition
Amid heated arguments over the tax law amendment, the then-chairman of Korea’s Financial Services Commission (FSC) Eun Sung-soo voiced out against crypto trading as a whole on April 22 at a National Policy Committee meeting, describing it as highly speculative and lacking any real value.
Eun likened cryptocurrency investors to children headed in the “wrong direction,” and that the “grown-ups” like himself need to correct their path. This angered many investors in Korea, prompting a national Blue House petition calling for the chairman to resign from his post. The anger mostly stemmed from people in their 20s and 30s feeling there are no investment opportunities for younger people, while the cost of living and the price of real estate continues to rise.
The Blue House petition met the required number of signatures of 200,000, which obligates the government authorities to answer to the petition. Two months after the petition was posted, the South Korean government responded by showing empathy for the younger generation of Korea but kept quiet about the request for the FSC chairman to step down. Instead, it consoled angry crypto investors by saying the new policies for crypto exchanges will help them eventually.
The crypto exchange regulations
Promising investors a safer and more transparent trading environment, the FSC proclaimed a regulatory renovation on virtual asset exchanges by applying amendments to “The Act on Reporting and Use of Certain Financial Transaction Information,” which became effective starting March 25. This act requires the trading platforms to acquire mainly two things —an Information Security Management System (ISMS) certification, and a contract with local banks to provide withdrawal and deposit accounts for exchange users under their real names. The act gave crypto businesses six months to completely meet the requirements and report to the Financial Intelligence Unit (FIU).
The ISMS certification is given by the Korea Internet & Security Agency (KISA) to a virtual asset trading platform that meets the government standards for the protection of the personal information of their users.
What comes after the ISMS certification is what exchanges find most fearsome — a mandate to acquire a contract with one of the local Korean banks to provide exchange users with real-name Korean won withdrawal and deposit accounts. The financial authorities are making sure that after Sept. 24, the reporting deadline for exchanges, every crypto investor uses a domestic trading platform with an account with their real name to withdraw or deposit the Korean won. By ridding anonymous transactions from crypto-to-fiat money, the FSC aims to reduce possibilities of money laundering, embezzlement or price manipulation.
Many small to medium exchanges have already closed down, with several stating this new requirement as the reason. Banks have also expressed frustration with the regulations. In order to issue real-name accounts for crypto exchange users, the banks would need to examine the exchanges on the possibility of being involved in financial crimes. In fact, the Korea Federation of Banks have sent a private request to the FSC asking for an exemption from anti-money laundering and counter-terrorism financing responsibilities when partnering with crypto exchanges, unless they had been intentionally or grossly negligent.
The request was soon turned down by the then-FSC chairman Eun Sung-soo. Lee Byung-uk, professor of digital finance at the Seoul School of Integrated Sciences & Technologies, told Forkast.News why banks feel pressured. “The risk of one money laundering case is far too great compared to the additional profit from getting more clients,” Many of the major banks including KB Kookmin Bank, Hana Bank, Woori Bank, Busan Bank and Toss Bank have announced that they will not partner with cryptocurrency exchanges.
Upbit, Korea’s largest exchange, won the necessary approvals and became the first licensed virtual asset exchange in Korea. Industry rivals Bithumb, CoinOne and Korbit have applied for licenses as well.
Out of the total number of 63 crypto exchanges, only those four have managed to fulfill both requirements. Twenty-five exchanges have been certified by KISA but have not yet acquired the real-name account bank contract. Although initially the government said any exchange not meeting both requirements would be shut down, it gave some leeway for these 25 exchanges to continue operating. However, they were ordered to operate solely token-to-token services, after deleting any Korean won-to-crypto functions.
The executives of the 25 exchanges say this worsens the extreme concentration of users and capital onto the four major exchanges. According to data from lawmaker Kang Min-kuk, the four major exchanges — Upbit, Bithumb, CoinOne and Korbit — account for 96.1% of the total deposits in South Korea’s crypto market, with over US$50 billion. The four combined have 12.5 million users while 18 other smaller exchanges without the cash-to-crypto functions have a combined total of only 2.21 million users.
Do Hyun-soo, CEO of ProBit pointed out that “exchanges that only operate token-to-token transactions have no business feasibility,” while adding that “the new regulations only guarantees the four major exchanges to monopolize the market.”
Nevertheless, most of these exchanges eventually succumbed to the impending deadline, announcing closure of their cash-to-crypto services — while promising users they will promptly secure a real-name bank account contract to reopen cash services.
Meanwhile, more than half of the exchanges that existed failed to comply with any of the requirements. These businesses have already announced suspension of services ahead of the deadline. At a forum on diagnosing potential damage from the crypto regulations, the Korea Fintech Association announced the mass closure of exchanges will lead to damages of over US$2.5 billion. It said the mass closure will destroy 44 domestic cryptocurrencies developed by Korean businesses that are listed on the exchanges facing closure. The association further asserted that this could greatly hinder innovative growth within crypto and blockchain startups in South Korea.
The FSC remains unmoved. New FSC chairman Ko Seung-beom reiterated there will be no extension of the grace period for exchanges and that the regulations will go as planned. As investor protective measures, the FSC required the closing exchanges to give their users one month to withdraw their cash and crypto belongings.
And more regulations …
The regulations on domestic exchanges had people wonder if users could instead resort to trading in foreign exchanges that operate in Korea. Eun Sung-soo responded to this in a National Assembly meeting that foreign exchanges will not be exempt from the obligations — the FSC followed up by sending a written notice to the overseas-based exchanges running in the country to comply with the national regulations. This led Binance to discontinue Korean language support, Korean won trading pairs, and Korean won payment options from Aug. 13. Japan’s Bitfront also announced the suspension of its services for Korean investors.
Executives and employees in the crypto industry saw more direct bans on cryptocurrency investments. The FSC announced in June that executives of virtual asset exchanges will be banned from trading cryptocurrencies on their own exchanges. This is an amendment to the same act that set requirements for the exchanges and banks, to additionally lower risks of price manipulation. Despite initial repercussions from the exchanges — claiming the ban will block fund flows essential to the operation — most major exchanges including Bithumb, Korbit and Upbit have since banned or limited executives and employees from trading on their corresponding platforms.
Upcoming … the travel rule
Compliance efforts of South Korean exchanges do not end after Korea’s domestic regulations — the so-called travel rule by the Financial Action Task Force (FATF) awaits. The travel rule, also known as FATF Recommendation #16, requires financial institutions and virtual asset businesses to collect personal information of users in transactions over a million Korean won (approximately US$850), which will help eliminate the risk of money laundering or terrorism funding. The South Korean government has accepted FATF’s recommendations last year and has added the rule as another requirement for virtual asset businesses to abide by. Albeit, the financial authorities have given the exchanges until March 25 next year to fully prepare for the travel rule.
As a response, Bithumb, CoinOne and Korbit have formed a joint venture named CODE to open a travel rule solution within this year that will help any exchange that remains eligible after the September deadline in preparing for the travel rule. Details of the joint venture service have yet been revealed. Upbit had initially joined the joint venture, but renounced its affiliation to formulate its own solution with Lambda256, Upbit owner Dunamu’s technology subsidiary.
A new chapter? Opinions differ
Will Sept. 24 become the start of a new chapter for South Korea’s crypto space? Experts’ opinions vary.
Kim Dae-jong, professor of business at Sejong University, told Forkast.News: “The South Korean government is, in essence, giving room for the crypto industry to develop on its own while eliminating risks of illegal activities. This will help Korea become a leading country in the fourth industrial revolution.”
On the other hand, professor Kim Hyoung-joong, head of the Cryptocurrency Research Center at Korea University, has expressed his concern on how financial authorities having more control over the exchanges may stifle innovation in Korea’s crypto space. Kim told Forkast.News: “The FSC is a very conservative agency. If it sees any risk, it tries to eliminate any further development. Hence, I do not believe that the FSC will support the adoption of new, innovative [crypto] services.”