Jae In Lee and Se Yeong Im of Bae Kim & Lee examine how regulators are increasingly turning their attention to the country’s virtual currency market
Bitcoin has become a worldwide phenomenon. Introduced to the public in 2009 with mixed reception – some praised its innovative characteristics owing to its unregulated, virtual elements while sceptics criticised it for being too volatile and unreliable for use as consideration. Despite such controversy, many new business ventures in Korea kicked off providing various services utilising bitcoin as a medium. With its rising popularity and higher profile, Korean financial regulators have put bitcoin under increased scrutiny. Currently, they are struggling with this new, virtual currency on many fronts including establishing a general regulatory framework, and regulations on the usage of bitcoin for international remittance services.
Current regulatory framework
At present, Korean law does not have a regulatory framework in place for virtual currencies. Regulators in the past made dicta comments indicating bitcoin was neither a currency nor a financial instrument regulated under the existing Korean regulatory regime, creating uncertainty for consumers and institutions alike. In the absence of a regulatory framework, entrepreneurs have been able to take advantage of bitcoin's non-existent legal status in their endeavours to introduce new ventures freely on the open market utilising bitcoin's virtual features. However, its unclear legal status has made many people sceptical, and has had a chilling effect on the use of bitcoin and associated services.
On October 24 2016, the Financial Services Commission (FSC) announced plans to provide a regulatory framework for virtual currencies. Since the announcement, various government authorities including the FSC, the Financial Supervisory Service (FSS), Bank of Korea and the Ministry of Strategy and Finance (MoSF), have launched a taskforce to review relevant issues like the legal status of virtual currencies and the implementation of anti-money laundering schemes. The taskforce aims to announce policy guidelines in the first half of 2017. Upon the promulgation of the policy guidelines, it is hoped that individuals, companies and institutions will be able to conduct bitcoin-related transactions with a higher degree of confidence in the integrity of its regulatory and legal underpinnings.
International remittances using bitcoin
The traditional method of transferring money internationally has been through certified financial institutions such as commercial banks. Although this method has proved safe and reliable, international remittance via this traditional method has not aged well, far too slow and expensive in the current digitised, connected world.
Because of this, bitcoin could be utilised as an alternative, being much faster and cheaper. Theoretically, this alterative will entail the customer sending money in domestic currency to a bitcoin remittance service provider. The service provider will then convert the domestic currency amount into bitcoin, while simultaneously transferring the converted bitcoin to the destination jurisdiction. Once bitcoin is transferred to the destination jurisdiction, it will be converted into local currency and transferred to the recipient's designated bank account. Under this mechanism, international remittance service providers and customers can save considerable time and cost.
Some Korean startups are already providing international remittance services via bitcoin. However, the legality of providing such services by non-financial licensed companies is controversial as under the Foreign Exchange Transaction Act (Feta), only licensed financial companies are legally permitted to make international payments. Although the actual payment of currency, as defined and regulated under Feta, does not occur in the alternative transaction method described above, regulators have taken the position that international remittance employing bitcoin should not be excluded from the current foreign exchange regulatory regime.
Given the emergence of various international remittance business models, however, the Korean government is amending relevant regulations in order to authorise startups to provide international remittance services.
Under the proposed amendment, newly-introduced concepts have surfaced, allowing any company that registers with the MoSF as a small sum overseas remittance service provider (RSP) to be able to transact in overseas remittance within the scope of Feta without obtaining a separate licence. Once registered, RSPs may remit money overseas provided each transaction does not exceed $3,000, with a cap limit at remitting and receiving up to $20,000 per year (per person).
The statutory eligibility requirements for the purposes of registering with the MoSF as an RSP are the following:
KRW2 billion ($1.8 million) in paid-in equity capital; and
a debt-to-capital ratio of less than 200%.
In addition, an RSP must either make a deposit with the FSS or purchase insurance policies to guarantee payments to its customers. Such a deposit amount with the FSS and the insured amount should be at least three times the expected average daily payment request amount, with KRW300 million as a minimum.
Lastly, the data processing facility maintained by an RSP should satisfy the standards set under the Electronic Financial Transactions Supervisory Regulation. An RSP should implement various measures to secure the reliability of the facility, including the installation of an access control system for key facilities and power generating units, as well as taking additional measures to protect terminals, digital data and data processing system.
Although the general public agrees on the necessity of regulation for consumer protection and reliability purposes, some have argued that these requirements are too burdensome for fintech startups and will act as unnecessary barriers for international remittance via virtual currencies.
In particular, although the Korean government has set a KRW2 billion minimum capital requirement threshold (as compared to a company providing domestic electronic remittance service which are required to maintain a KRW3 billion paid-in capital), there is significant concern that this threshold is too high for a startup. Given the current Korean market conditions, it would be highly unlikely for many smaller startups to secure additional investments to satisfy such minimum capital requirement threshold before the new regulations become effective.
Outlook
On the one hand, the Korean government is encouraging the development of the fintech industry while on the other firmly adhering to the principle of consumer protection over innovation. At this point, however, it is too early to tell the kind of regulatory framework that will be implemented and how it will affect the fintech industry. Once such a regulatory framework begins to take shape, we will see its full impact and implications on the fintech industry, as only then will consumers and companies be able to conduct business and carry out transactions on the back of higher legal certainty and protection.
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Jae In LeePartner, Bae, Kim & Lee Seoul, South Korea T: +82-2-3404-6537 Jae In Lee worked as deputy director of the Financial Services Commission from March 2009 to November 2012, where she handled issuance of financial licences, issuance of sanctions against breach of the law, and revision and amendment of financial laws and regulations. After joining Bae, Kim & Lee in 2013, she has represented corporate clients, specialising in financial regulatory matters such as obtaining new licences and necessary approvals for various financial businesses, often in the context of M&As or reorganisations. Recent cases she has worked on include the merger between Hana Bank and Korea Exchange Bank, and the Kakao Bank consortium obtaining internet banking licence. She maintains close working relationship with financial officials in the Korean financial regulatory authorities, and currently serves as an external consultant for the Korean government on numerous advisory committees. |
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Se Yeong ImAssociate, Bae, Kim & Lee Seoul, South Korea T: +82-2-3404-7640 Se Yeong Im joined Bae, Kim & Lee in 2015 after serving as a military judicial officer. He has expertise in M&A and financial regulatory matters. He advises domestic and foreign corporations on financial regulations including fintech, foreign exchange, data protection and IT issues. Recent cases he worked on include Kakao Bank consortium's obtaining internet banking licence. He double-majored in Computer Science and Chemical Engineering at the University of Illinois at Urbana Champaign (bachelor's degree) and graduated from Yeonsei University Law School. |