As is well known, anti-money laundering (AML) and know-your-customer rules (KYC) are obligations of service providers like banks and other financial institutions. Their aim is to facilitate investigations into the real identity of customers and the purpose and source of their transactions, so that the services provided to customers will not be used for money laundering, financing of terrorism, tax evasion, or other illegal activities. As transactions involving cryptocurrencies are by nature global yet anonymous, there is thus much room for misuse, so we cannot emphasise enough the importance of AML/KYC in the crypto space.
In Korea, AML/KYC obligations and procedures are provided for by the Act on Reporting and Use of Certain Financial Transaction Information (Ruftia). In principle, Ruftia applies to banks and other financial institutions. As cryptocurrency exchanges are not regarded as financial institutions in Korea, they are not (yet) technically under the purview of Ruftia and thus, are not legally obliged to abide by AML and KYC regulations.
The ruling party lawmakers have proposed an amendment to Ruftia by which cryptocurrency exchanges are to be deemed financial institutions for the purpose of the application of the Act. This would cause AML/KYC obligations to be imposed on the exchanges. This proposed amendment is still pending in the National Assembly of Korea.
That said, however, as a matter of practice, the Korea Financial Intelligence Unit (FIU), following the general international trend, established its own anti-money laundering guideline relating to Cryptocurrencies (AML guideline) and has tried to apply it (in the form most recently amended on June 27 2018) to cryptocurrency exchanges in Korea. Nevertheless, it should be noted that the AML guideline is not legally binding at this point in time.
Under this AML guideline, virtual currencies (which is the preferred Korean legal term for cryptocurrencies) are defined as a 'token or information stored on said token perceived as a means of exchange or of storage of value by a contracting party, and that is transferrable by electronic means,' and electronic currencies or prepaid payment methods as defined under the Electronic Financial Transaction Act are excluded from the definition of cryptocurrencies. Under this definition, bitcoin, Ethereum, Ripple, and other coins or tokens generated and offered in various initial coin offerings (ICOs) will most likely fall under the definition of virtual currencies included in the AML guideline.
Virtual currency exchanges (or cryptocurrency exchanges) are defined in the guideline as 'any person or entity who engages in the business of storage, management, exchange, sale, purchase or brokerage of the virtual currencies (or cryptocurrencies)'.
The aim of the AML guideline, as well as several bills or amendments to existing laws proposed by lawmakers from the ruling and opposition parties, is to regulate cryptocurrency exchanges, in some way or another. Therefore, it goes without saying that that all the cryptocurrency exchanges must comply with the AML guideline to the extent that it is possible.
Under this guideline, banks which do business with cryptocurrency exchanges are required to monitor if they are in compliance with the guideline and ensure that these exchanges perform checks on the name, birth date, address and contact information of their customers. In order to open bank accounts and do business with the banks, the cryptocurrency exchanges are required to conduct the AMK and KYC procedures.
As part of the AML/KYC process, major cryptocurrency exchanges, like Bithumb, Upbit, Korbit, and Coinone, (i) check basic information of their customers, such as name, email address, country of residence, and mobile phone number, when the customers first sign up for their services; and then (ii) verify the identities of specific customers through mobile phone identification methods when the customers actually want to carry out cryptocurrency transactions.
As already stated, it is intended that all laws proposed by the Korean lawmakers will apply to cryptocurrency exchanges and that AML and KYC obligations will also be imposed on them. Given these circumstances, it is clear that if in the future there is a new law or amendment to an existing law regulating cryptocurrencies, the AML and KYC regulations will be the first and foremost provisions that will be incorporated into such laws. That is why cryptocurrency exchanges are well advised to make relevant preparations in advance.
|Chan Sik Ahn|