Virtual Currency – Enhancement of Control over Korean Cryptocurrency Exchanges

On
December 28, 2017, the Korean joint task force on cryptocurrency, consisting of
various governmental agencies including the Office for Government Policy
Coordination, Financial Supervisory Commission, the Ministry of Justice and the
Ministry of Strategy and Finance, among others, announced that it will continue
its implementation of its previously announced emergency measures on December
13, 2017 (for more information, please see BKL’s 12/14 newsletter), and in
addition take the following actions.

1. Prohibition on the provision
   of banking services to non-compliant cryptocurrency exchanges
   On December 13, 2017, the Korean government announced
   emergency measures in response to the increasingly speculative domestic
   cryptocurrency market, including restrictions on the participation of minors,
   foreigners and financial institutions on domestic cryptocurrency exchanges
   (each, an “Exchange”).
   On December 28, 2017, the Korean government stated that
   it will further instruct domestic financial institutions to refrain from
   providing remittance services to Exchanges that are found to be in violation of
   the above restrictions. This is intended to ensure the Exchanges’ compliance
   with such restrictions, failing which a non-compliant Exchange’s ability to
   operate would be compromised.
   Furthermore, the Korean Fair Trade Commission and other
   relevant governmental agencies may conduct on-site inspections of the Exchanges
   in order to verify their compliance with the consumer protection regulations as
   well as to ensure the adequacy of the IT and security systems maintained by an
   Exchange. Violations will be reported to the Exchange’s bank, which would then
   consider the suspension of remittance services to the Exchange.
2. Closure of Exchanges
   The Ministry of Justice has proposed the establishment of
   a “special law” which would grant the Korean government the ability to order to
   closure of an Exchange.
   However, we note that the particulars of any such
   “special law” have not been determined and no draft legislation or proposal has
   yet to be made. The government is in the process of deliberating the merits and
   necessity of a “special law” and consequently, we cannot state when any such
   “special law” would be enacted or in what form, if at all.
3. Enhancement of Personal
   Identification Procedures
   The Exchanges currently provide each user (or customer)
   with a “virtual” bank account held under the name of the Exchange. Any deposits
   or withdrawals made by a user are typically made from the user’s bank account
   to the user’s “virtual” bank account held by the Exchange.
   This meant that the user’s bank account and the user’s
   “virtual” bank account could be maintained at separate banking institutions,
   and due to this discrepancy, the bank of the “virtual” account would have
   limited access to the user’s personal information.
   Previously on September 9, 2017, the Korean government
   had issued guidelines instructing domestic banking institutions to refrain from
   processing deposits or withdrawals to Exchanges for users whose personal
   identity could not be verified. On December 28, 2017, the Korean government has
   taken the additional step of prohibiting the practice of utilizing “virtual”
   bank accounts. In the future, in order to access an Exchange, a user must
   maintain a bank account in their name, at the same bank as that of the
   Exchange.
   By requiring the “sameness” of the bank accounts of the
   user and the Exchange, the Korean government seeks to ensure that banking
   institutions utilized by the Exchanges have greater access to a user’s personal
   information as well as transaction history. This would facilitate the banks’
   compliance with the verification of personal identity requirements as well as
   increase their ability to detect any non-compliance with the age and
   nationality restrictions and illegal or fraudulent activities, such as money
   laundering.
   The Korean government will provide further details,
   including how “virtual” bank accounts for existing users, will be transferred
   to new bank accounts at a later date.
4. Online Marketing
   Regulations/Miscellaneous
   The Korean government has stated its intention to implement certain voluntary
   measures to limit the Exchanges’ online marketing and advertising activities,
   such as through portal websites. In addition, the Korean government emphasized
   its intention to strictly enforce cryptocurrency related regulations and punish
   violators.