Revised drafts and proposals for crypto-related Special Reporting Act released

Today Coindesk Korea obtained drafts and proposals made by advisors to financial authorities and members of the Blockchain Association in regard to definitions and rules for virtual assets exchanges in South Korea when the amendment to the Special Financial Information Act (Special Act) takes effect next year.

Currently the Financial Intelligence Unit (FIU) is entertaining opinions and gathering expertise on how to formulate reasonable definitions and rules for entities that will need to abide by the new regulations next year. Mostly the regulations will apply to virtual assets exchanges and virtual asset providers (VASPs) headquartered in the country. A review of the following obtained drafts offer insight into the discussion and direction of lawmakers tasked with laying the groundwork for the regulations to hold water.

The following are excerpts from the obtained drafts translated from the native Korean. Some have been summarized and/or abridged.

Scope of Business (Articles 1, 2, and 7)

“[The first thing the FIU needs to set is the scope of VASPs which will be subject to the Special Reporting Act. Starting in March and applying to all VASPs by September 2021, thorough reporting of cryptocurrency transactions must be made to the FIU. Businesses not categorized as a VASP can continue operating their business with no further AML obligations.]”

There was no set definition of VASP itself, but some suggested that the VASP reporting targets should be narrowed down to crypto exchanges and trustees. One advisor, however, suggested that VASPs should also include cryptocurrency issuers, such as companies that have done an ICO. This would include companies such as ICON and Terra. One issue raised by this is that most of the companies that did an ICO in Korea do not have their HQ in the country.

Another advisor sought to include virtual asset rental services, collateral, trust, and wallet management companies as VASPs. This would mean DeFi companies such as Dunamu’s DXM and Delio would have to report.

Real Name Deposit and Withdrawal Accounts (Articles 3, 7, and 9)

After implementing the revised law, the highest barrier to entry for VASPs is to secure a real name deposit and withdrawal bank account. Currently, only Upbit, Bithumb, CoinOne, and Korbit exchanges that such contracts.

There was a suggestion that “[clear and objective criteria for issuing a real name account is essential.]” Meanwhile, others suggested that such accounts should be issued automatically to VASPs that meet the requirements. The second suggestion was backed by an advisory panel on the premise that in the future, VASPs will be fully responsible for preventing money laundering rather than the authorities.

Issuing banks were considered in the discussion too. It was suggested that banks should be given discretionary power to judge whether a VASP is fit for a real name account contract at all. This is the rough arrangement between VASPs and banks now but the guidelines for issuance are vague at best. Other financial institutions such as securities companies may be able to issue real name accounts in the future as well.

The idea of securities companies issuing real name accounts is derived from the matter of fact that before the real name accounts were mandatory for VASPs, some utilized securities accounts for trading. The Financial Services Commission (FSC) put an end to that with their guidelines from 2018 since securities accounts were for the purpose of trading securities only.

Ineligible to Report (Articles 3, 7, and 9)

“[Shareholders of a VASP with a stake of 20% or more, or the largest shareholder of a VASP when such a stakeholder is not present, and the directors will not have any punishments from the Financial Relations Act]”

Under the Special Act, the FIU may refuse to allow a VASP to report transactions, thereby nullifying their eligibility to operate legally, if VASP representatives and executives have been in violation of financial laws. This also means that VASPs should reveal a list of shareholders and their private financial statements with their regular transactions reports.

Privacy tokens such as Monero fell victim to further attack in this section. There were strong suggestions to deny transaction information if it includes privacy tokens since they are at best difficult to track. Doing so would allow the FIU to filter out VASPs that do business which may lead to future fraudulent acts.

Travel Rules (Articles 1, 3, 5, and 6)

The money transfer rule, otherwise know as the Travel Rule, is a major issue in AML efforts related to cryptocurrency. So far there have been no known feasible solutions to the problem wherein an individual can freely send cryptocurrency to any address the please regardless of the physical destination of the owner of said wallet address.

The association ceded to put the issue off until a later date. “[It should be put off until international standards are established.]”

One suggestion from the advisory board attempted to tackle the issue in part by proposing VASPs add a ‘refuse to send’ option on transactions where the recipient’s address information cannot be verified. Moreover, he said that cryptocurrency should only be transferable to wallet addresses that have a verified individual associated with them.

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