South Korea Will Place More Responsibility on Cryptocurrency Exchanges as “Banks”
Throughout June, reports that the South Korean government plans to acknowledge, consider, and regulate cryptocurrency exchanges as banks have surfaced from trusted sources and mainstream media outlets.
Cryptocurrency Exchanges as Banks
The Korea Financial Intelligence Unit (KFIU) confirmed the reports last week, stating that it will impose strict anti-money laundering (AML) and Know Your Customer (KYC) regulations on cryptocurrency exchanges to place them in the same category as banks.
A KFIU representative said in a statement:
“Under current regulations, there are clear limitations in preventing money laundering on cryptocurrency exchanges because the only way authorities can spot suspicious transactions is through banks. If the bill of lawmaker Jae Yoon-kyung from the Democratic Party of Korea passes, local authorities will be able to impose identical regulations on cryptocurrency exchanges that are implemented on commercial banks.”
This week, DongA, a major mainstream media outlet in South Korea, reported that the government’s decision to regulate cryptocurrency trading platforms as banks rather than as communication vendors as it has done since 2015 was triggered by two major factors: increase in hacking attacks and prevention of usage of cryptocurrencies in money laundering.
Since 2017, the South Korean cryptocurrency exchange market has suffered many hacking attacks and security breaches. Most recently, Coinrail, a small cryptocurrency exchange in South Korea, lost $40 million in user funds after falling victim to a security breach. Even Bithumb, the country’s biggest cryptocurrency exchange, experienced two hacking attacks in mid-2017.
In an interview with Hankyung, Moon Byung-ki, SK Infotech high-tech department director, a subsidiary company of the country’s largest telecommunication conglomerate, stated that the increase in the number of hacking attacks, specifically amongst small to medium-sized cryptocurrency exchange, can be attributable to the focus of exchanges on new digital asset integration, rather than security.
“Small to medium-sized cryptocurrency exchanges delay the implementation of necessary security measures and are only focusing on business expansion,” Moon said.
In response, the South Korean government has decided to implement a stricter regulatory framework and oversee cryptocurrency exchanges as strictly regulated financial institutions, and eliminate the current policy that enables businesses to launch cryptocurrency trading platforms with a mere $30 fee, as communication vendors.
Reasoning Behind Decision
An insider within the cryptocurrency market of South Korea stated that the government no longer wants to be responsible for hacking attacks and loss of investor funds and the categorization of cryptocurrency exchanges as banks allow various financial authorities including the KFIU, Free Trade Commission (FTC), and Financial Service Commission (FSC) to have direct control and authority of the cryptocurrency market.
“The government likely is imposing the new regulation to prevent the Free Trade Commission from being responsible for potential hacking attacks and thefts in the future. Currently, the government is working to allow the Free Trade Commission, Financial Service Commission, and the Congress to have complete authority over the cryptocurrency sector to regulate the market more strictly, with a primary focus on investor protection,” the source said.
Naturally, as the government tightens regulations on the cryptocurrency market, exchanges will have to implement better security measures and obtain approval from various government agencies to be compliant with local regulations, allowing the market to become more legitimate and safe for local investors.