According to Business Korea, hundreds of minor crypto exchanges in South Korea could run smack into heightened scrutiny for failing to abide by proposed enhanced know-your-customer (KYC) regulations, which would require exchanges to only provide services to users with “real-name accounts” issued by local financial institutions.
Earlier this month, the Financial Action Task Force, an intergovernmental organization under the G7, proposed guidelines that encourage all crypto exchanges to share customer data.
Although industry executives and experts have indicated that the ruling of the FATF is highly impractical and may be counterproductive, many countries in the G7 and the G20 – including South Korea – are likely to follow the recommendations of the FATF.
Potential Impact on South Korean Crypto Industry
Local reports have indicated that hundreds of crypto exchanges in South Korea may be kicked out of the region or pressured to close down their services based on their spotty track records if the businesses do not swiftly implement robust internal management systems.
However, major crypto exchanges in South Korea including Bithumb, UPbit, Coinone, and Korbit have been using real-name accounts under the strict guidelines issued by the Financial Services Commission (FSC) and as such, the big five exchanges will not be affected by the recent FATF ruling.
Considering that the overwhelming majority of trades in South Korea are processed through the big five exchanges, primarily Bithumb and UPbit, even if small exchanges are forced to close down temporarily or permanently, it will likely have no noticeable effect on the local exchange market.
The Business Korea report read:
“As Deputy Prime Minister and Finance Minister Hong Nam-ki agreed to actively implement the exchange management and supervision plans from the FATF’s financial recommendations at a recent meeting of central bank governors and finance ministers of the G20 countries, South Korean cryptocurrency exchanges are also expected to be affected by the FATF’s recommendations.”
The FSC and local financial regulators have already submitted a revision of the Act on Specified Financial Transaction Information bill to the National Assembly, adding additional requirements to existing cryptocurrency legislation mainly targeted at exchanges.
If the bill gets passed in the near term, exchanges that are not compliant with existing regulations may face up to five years in prison and $42,975 in fines, a move that may lead to the shutdown of many exchanges.
Due to the brutal 16-month correction throughout 2018 and 2019, small exchanges have seen a dramatic decline in revenue and most of the exchanges have recorded substantial net losses in the past year and a half.
A move to become fully compliant with new policies may require local exchanges to obtain fresh capital to cover legal costs and additional expenses to bring in security experts and internal management teams.
Bad for Podunk Crypto Exchanges, Good for Bitcoin at Large?
Jeon Ha-jin, chairman of the Korea Blockchain Association’s self-regulatory committee, has said that the potential of South Korea’s crypto exchange market has been limited due to the government’s reluctance to acknowledge the market as a proper industry up until 2018.
“If the message (related to cryptocurrency) is delivered at the G20 summit, governments across the world will work on making cryptocurrency regulations. South Korea was at the center of the cryptocurrency market but it’s a pity it plunked down after the government neglected the market,” said Jeon.
If the FATF delivers its recommendation at the G20 summit later this year, local industry experts have indicated that in spite of its negative connotations, it may further legitimize the global crypto exchange market and the rest of the industry as a whole.