[Korea finance act] ②Crypto exchange, Only the big ones survive?
[Korea Finance Act passes…What happens to the market?] The act on Reporting and Use of certain financial transaction information(Korea Finance Act) passed the Korea Finance Act on March 5, opening a new chapter for cryptocurrency exchanges in the country. The legislation lays out a legal basis for cryptocurrency businesses, incorporating the virtual currency system into the existing framework for traditional financial institutions. It now requires cryptocurrencies operators to abide by regulations including anti-money laundering and bans on financing terrorism. Major cryptocurrency exchanges Bithumb, Upbit, Korbit and Coinone had already established a hotline last year to prevent money laundering. Smaller ones, however, such as Gopax, Hanbitco which don’t have real-name accounts for virtual currency trades are hurriedly working to get approval from the Information Security Management System through the state-run Korea Internet & Security Agency, one of the requirements for doing financial business in Korea. What challenges await cryptocurrency exchanges with the passage of the new measure? The Korea Finance Act won’t go into effect for a year. In the meantime, authorities and cryptocurrency operators will come up with necessary regulations and policies for the new bill’s smooth implementation. The new bill now requires each cryptocurrency exchange to be responsible for opening a real-name account, which was previously under the control of banks. Most banks for that reason have refused to issue real-name accounts for cryptocurrency trades, as they would share in the responsibility for potential money laundering via the cryptocurrencies. For example, if laundered money from a cryptocurrency exchange flows into a terror organization in the United States, the bank that created the real-name account for the trade would be hit with sanctions as well. It would not only be penalized by the U.S. government, but its access to the U.S. finance network would also be restricted. This means that the bank in question would not be allowed to trade U.S. dollars, meaning it would ultimately shut down. In the future, however, the responsibility will only be imposed on the exchanges. Banks, from now on, therefore, don’t have any other reason to refuse investors who want to trade cryptocurrencies. The so-called travel rule is also an issue for the exchanges. The travel rule offers new compliance guidance for cryptocurrency exchanges, to which it assigns an “obligation to obtain, hold and transmit required originator and beneficiary information in order to identify and report suspicious transactions.” The exchanges are planning to fortify their Know Your Customer (KYC) system, a process of identifying the client before allowing certain financial acts. Upbit jump-started its preparation by fortifying its KYC system beginning last year. Even before the revised Korea Finance Act goes into effect, some cryptocurrency exchanges are either minimizing their business, if not shutting down entirely. CPDAX, a cryptocurrency exchange in Korea operated by one of the industry’s oldest, Coinplug, suspended trade of Ethererum in February. Coinplug has said it will gradually downsize its exchange business and focus on its Decentralized Identifier business. An obvious reason for business shutdowns is a decreasing amount of cryptocurrency trade. The industry insiders, however, also speculate that business has slowed due to heavy regulations imposed on cryptocurrency exchanges in Korea. Similar cases occurred in the global market as well. Coinone in February shut down its service in Indonesia. The Southeast Asian country started to only allow authorized cryptocurrency exchanges to do business in the country beginning in February. Coinone, however, failed to get certification because it was under-qualified in select sectors. The latest Korea Finance Bill is largely expected to lay the legal groundwork for cryptocurrency business in the country. The smaller exchanges that weren’t able to have real-name accounts would be able to get opportunities under the revised regulation. Other financial companies that have hesitated to enter the cryptocurrency market due to vague regulations will now be more enthusiastic about it. That rosy picture, however, applies only to companies with enough capital. Travel rules or Information Security Management System certifications have exquisitely high standards for qualification. Law firm Bae, Kim & Lee recently said in a report that the security certification process requires at least 100 million won. It is possible that startups or small- and mid-sized cryptocurrency exchanges will not be able to get over that initial hurdle.