South Korea's Updated Crypto Regulations: Getting Ready for the Altered Landscape [Revised October 2021]

South Korea's Updated Crypto Regulations: Getting Ready for the Altered Landscape [Revised October 2021]

In response to the upcoming Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) rule changes in South Korea, virtual asset service providers (VASPs) must take proactive steps to ensure compliance. These reforms, set to take effect from March 2021, will primarily target cryptocurrency exchanges, custodian wallet providers, and Initial Coin Offering (ICO) projects.

Understanding the New Regulatory Scope and Obligations

The South Korean AML/CTF reforms will broaden the scope of designated services covering virtual assets, including transfers of value, not just digital currency exchange platforms. Providers involved in transfer of value services will face new reporting obligations related to transferring money or property under electronic fund transfer instructions or remittance services.

South Korea's new framework aligns with international standards such as the Financial Action Task Force's (FATF) recommendations, which emphasize identifying beneficial owners, enforcing registration/licensing, and reporting suspicious transactions.

Reviewing and Updating Compliance Programs

VASPs must revise their AML/CTF policies and controls to include enhanced customer due diligence (CDD), know your customer (KYC) procedures, and transaction monitoring tailored to virtual asset risks. They should also integrate requirements to report on inter-institutional value transfers (IVTS), which are newly designated under the rules effective 31 March 2022.

Enhancing Customer Identification and Beneficial Ownership Procedures

To meet FATF and South Korean mandates, VASPs must implement more robust identification methods for customers and beneficial owners. This addresses previous gaps in offshore VASP oversight.

Upgrading Technology and Record-Keeping Systems

VASPs should invest in systems capable of tracking and reporting all value transfer chains as required by the new regulations, including electronic record-keeping and timely submission of required reports to authorities. Systems should also be able to distinguish value transfers under different service categories introduced by the reforms.

Staff Training and Awareness

Compliance and operational staff should be educated on the new AML/CTF obligations, reporting triggers, and the broader definition of designated services under the updated South Korean crypto rules.

Engaging with Regulatory Updates and Industry Guidance

VASPs should regularly monitor updates from the South Korean Financial Services Commission and Financial Intelligence Unit regarding implementation details. They should also participate in industry consultations and seek advisory support to interpret complex new requirements and ensure timely compliance.

Preparing for Enhanced Supervision and Enforcement

VASPs should anticipate increased regulatory scrutiny and potential audits to verify compliance with new AML/CTF rules as South Korea accelerates crypto regulation harmonized with global frameworks.

Key Requirements and Consequences

Korean crypto businesses must implement a technical solution for the exchange of customers' personal data with transaction counterparties (FATF's R.16 "travel rule"). They must also register an authorized company bank account. Non-compliance with the authorized bank account requirement can result in a 5-year prison sentence for company owners or a 50 million Korean Won fine (around 43,000 USD).

All crypto service providers in South Korea must transform their AML/KYC systems, register with the Korean financial regulators before starting their activity, and acquire an Information Security Management System (ISMS) certificate at the Korea Internet & Security Agency (KISA).

The deadline for Korean crypto service providers to become fully compliant is September 2021. The new law applies to a wide range of virtual asset service providers, including those involved in the selling or buying of cryptocurrencies, crypto-to-crypto exchanges, transferring of cryptocurrencies, and storage or management of virtual assets.

The changes are aimed at combating money laundering and terrorist financing in the virtual asset sector. The new Korean legislation creates a safer economic environment by giving financial regulators access to data regarding crypto transactions.

Initially introduced by the Financial Services Commission (FSC) in 2018, these measures were not mandatory until recently. The Act on the Reporting and Use of Specific Financial Transaction Information, in South Korea, was amended on 5 March 2020.

Until now, only the 4 biggest Korean exchanges-Bithumb, Upbit, Coinone, and Korbit-had implemented these measures. However, all crypto service providers in South Korea must now transform their AML/KYC systems to ensure a secure and compliant virtual asset ecosystem.

[1] Financial Services Commission (FSC), "Reports on Measures to Strengthen AML/CTF Regulations for Virtual Asset Service Providers," 2021.

[2] Financial Action Task Force (FATF), "Guidance for a Risk-Based Approach to Virtual Assets," 2019.

[3] South Korean Financial Services Commission (FSC), "Guidelines on AML/CTF for Virtual Asset Service Providers," 2021.

1. To meet the enhanced regulatory requirements and support South Korea's financial industry, virtual asset service providers (VASPs) must upgrade their compliance programs and AML/CTF policies, focusing on enhanced customer due diligence (CDD), natural person identification methods, and transaction monitoring for virtual assets.
2. As the finance sector evolves in South Korea, VASPs need to integrate new technology systems capable of tracking, reporting, and recording transactions as mandated by the upcoming AML/CTF reforms, ensuring compliance with international standards set by organizations such as the Financial Action Task Force (FATF).

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