South Korea tightens its Crypto regulations
South Korean crypto interest continues to grow and dominate the market as the country is currently estimated to account for 10 percent of global crypto transactions. Good News for the South Korean crypto space also comes from regulations that are currently making huge progress in getting this space regulated for mass adoption within the country. From the massive crackdown on crypto exchanges to the strict rules willing to be imposed for token issuers and NFTs, this is a huge sign going forward for the crypto space. So what is the progress made in South Korea crypto regulations? And what does the future mean for the crypto space within the country?
What is the progress made on South Korea Crypto regulations?
South Korea has always remained open towards its relation with Cryptocurrency with the first domestic exchange launch way back in 2013 but the largely unregulated industry has been a source of both criminal activities and financial crimes. According to estimates by South Korean law enforcement agencies, cryptocurrency-related crimes have resulted in losses of $4.9 billion since 2017.
This is why beginning in late 2020, Korean authorities pushed through an initiative to begin taxing crypto trading profits. In January the amended tax law was announced to take into effect at the beginning of 2022. The amended law will levy 20% taxes on profit earned from crypto transactions that are above the limit of 2.5 million Korean won or US$ 2,200. The Korean National Tax Services has also expanded this crypto law to not only include domestic investors but also include foreign crypto exchanges and businesses within the country.
This immediately clearly backlash as the issue at hand is the categorization of the virtual assets itself. Right now, virtual assets are categorized under “other income,” which is the same category as someone trading art. Now there is a huge problem of demanding citizens pay taxes on cryptocurrencies while the government has yet to adopt an official definition of what a cryptocurrency or virtual asset is which is why industry members and some lawmakers have managed to defer this law to 2023 until crypto is clearly defined.
“There is an inconsistent system for imposing taxes without a clear basis on how to legally define cryptocurrencies in our system… but only in Korea does taxation come before regulation.” says Representative Kim Young-jin, Chairman of the Tax Subcommittee.
In March 2021, South Korea passed new legislation to strengthen the supervision of virtual assets. Under the new legislation all virtual asset management providers should acquire mainly two things — an Information Security Management System (ISMS) certification, and a contract with local banks to provide withdrawal and deposit accounts for exchange users under their real names. This act also will provide 6 months for all these virtual asset providers to the Financial Intelligence Unit (FIU).
Out of the total number of 63 crypto exchanges operating in the country, only 4 have managed to fulfill both requirements which is UpBit, Bithumb, CoinOne and Korbit who currently account for 96.1% of the total deposits in South Korea’s crypto market, with over US$50 billion. Twenty-five other exchanges have been certified by KISA but have not yet acquired the real-name account bank contract. Although they were initially planned to be shut down, these 25 exchanges currently operate on a token to token service without any function to encash deposits to fiat money.
More stricter regulations are also in place for executives and employees working in the crypto industry as the FSC announced in June that executives of virtual asset exchanges will be banned from trading cryptocurrencies on their own exchanges as this is in place to lower price manipulation by internal trading. Compliance efforts of South Korean exchanges also do not end domestically as the so-called travel rule by the Financial Action Task Force (FATF) awaits. The travel rule, also known as FATF Recommendation #16, requires financial institutions and virtual asset businesses to collect personal information of users in transactions over a million Korean won (approximately US$850), which will help eliminate the risk of money laundering or terrorism funding.
The FSC is also looking to tighten the regulations for token issuers and NFTs who wish to get their virtual assets traded on South Korean exchanges. The FSC would require these entities to submit a white paper, obtain a favorable rating from a recognized token evaluation service, obtain a legal review of the project, and disclose regular business reports to users. It also considers stablecoins like Tether, NFTs and privacy coins like Dash, Monero within this category.
Failure to comply with the rules would carry a penalty of at least five years in prison plus three to five times the amount of the “unfair profit” made in fines. Unfair profit would be considered any profit made while the businesses were in non-compliance with the law.
What does this mean going ahead?
The regulations put in place clearly shows the intention of the government which is to regulate the space and protect the well being of the South Korean crypto investors. As more and more South Korean investors, including younger ones flock the market, the crypto space will continue to explode and currently the total transaction amount of cryptocurrencies in Korea has surpassed that of KOSPI, the domestic stock market. With the annual crypto trading volume already tripled from the ones in 2019 and an eagerness from the government to regulate the space, there is no stopping this tech savvy country from leading the DeFi space.
As told by Kim Dae-jong, professor of business at Sejong University “The South Korean government is, in essence, giving room for the crypto industry to develop on its own while eliminating risks of illegal activities. This will help Korea become a leading country in the fourth industrial revolution.”
We in Nagaya Technologies Pte. Ltd are excited to hear the upcoming regulations and structure coming to the South Korean crypto space. We have created the world’s first hybrid cryptocurrency Nagaya and we are pleased to announce that Nagaya will be used as an official payment method in a new shopping mall called P4 Lala Square that is located in Sejong City, South Korea. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial