Key Takeaways:
- South Korea is rapidly advancing virtual asset regulation, specifically to monitor cross-border transactions and address a "blind spot" in oversight that has facilitated financial crimes.
- New regulations will mandate businesses involved in cross-border virtual asset transfers to register and report monthly to the Bank of Korea.
- A 2020 Korea Customs Service report highlighted significant foreign exchange crimes involving virtual assets, emphasising the need for tighter controls to counter tax evasion and money laundering.
- Alongside these efforts, South Korea enacted the Virtual Asset User Protection Act (VAUPA), which mandates increased compliance for Virtual Asset Service Providers to safeguard consumers.
- The formation of a 15-member Virtual Asset Committee will enhance structured discussions on policy, with a goal to integrate virtual assets responsibly into South Korea's regulatory framework.
- South Korea's current approach contrasts with proactive jurisdictions like the UAE, focusing more on closing regulatory gaps than on creating a unified, innovation-supportive regulatory framework.
Introduction
South Korea is on a mission for rapid regulation of virtual assets given the increasing adoption in the local population. South Korea's Minister of Economy and Finance, Choi Sang-mok, unveiled plans to introduce regulations specifically for monitoring cross-border transactions of virtual assets, the latest of many sweeping regulatory initiatives introduced in the jurisdiction.1 You can read our previous update here.
New Year, New Regulations
The upcoming regulations will apply to all businesses that transfer virtual assets across international borders. These businesses will be required to register with the relevant authority, as designated by the regulations (likely to be the Korean Financial Services Commission ("FSC")), and report all cross-border transactions to the Bank of Korea monthly. Additionally, the terms "virtual assets" and "virtual asset business operators" will be defined in the Foreign Exchange Transaction Act to give a legal foundation to these regulations.
Relevant legislative processes to effectuate the regulations are expected in the second half of 2025.2 These processes will, in turn, guide various authorities, including the Korea Customs Service ("KCS"), the Korean Financial Intelligence Unit, and the FSC, amongst others, in overseeing and tracking illegal transactions.3
This is an understandable development, considering the 2020 KCS Report finding that approximately 11 trillion Korean Won (approximately USD 7.83 billion) had been linked to foreign exchange crimes, of which 81.3% (approximately USD 6.36 billion) involved virtual assets.4 The lack of regulatory oversight left a "blind spot," concealing criminal transactions.5 Regulators were restricted when seeking enforcement as criminals were effectively evading liability. Monitoring all cross-border virtual asset transactions would enable the authorities to proactively tackle tax evasion and money laundering.
The Broader Legislative Trend in South Korea
Earlier this year, South Korea introduced the Virtual Asset User Protection Act ("VAUPA"), aimed at imposing stricter compliance requirements on Virtual Asset Service Providers to enhance consumer protection and tackle unfair trade practices. We have analysed the mandates of the VAUPA and its impact in a separate piece. The FSC has notified major virtual asset exchanges in South Korea before the VAUPA implementation to mandatorily conduct regular evaluations of the tokens they list.6
Recognising that VAUPA implementation would be incomplete without other regulatory supplements, a 15-member Virtual Asset Committee ("VAC") was constituted as a policy and institutional advisory body.7 The VAC will comprise members from governmental agencies and the private sector, with the FSC vice-chairperson chairing it.
The VAC is expected to spur South Korea's enterprising regulatory actions, aided by structured discussion involving all key stakeholders, to properly integrate new innovations in virtual assets into the regulatory landscape. The effect of this proactivity is evident as the FSC has announced plans to review its ban on spot virtual asset exchange-traded funds to support the retail virtual asset sector.8
Concluding Thoughts
The South Korean regulator's proactivity is in line with that of other major jurisdictions as more governments have acknowledged the need to regulate virtual assets. With the victory of president-elect Trump last week, the crypto world has geared itself for a possible global regulatory shift (we penned downsome thoughts on this last week). Notably, other leading jurisdictions for crypto regulation, like the United Arab Emirates ("UAE"), have set up robust frameworks supporting innovation and businesses while designing policies to protect investors. As opposed to the UAE's tapestry of varied regulatory authorities with broad regulations, the South Korean approach so far has been to block identified gaps.
South Korea, similar to the US, has taken a more reactionary approach to virtual asset regulations by aiming to fill gaps, give broader enforcement powers and see where the chips fall as they may. Comparatively, jurisdictions like the UAE and Singapore have taken a more proactive approach that seeks to make the industry safer and more reliable, while tamping down on its more undesirable effects and mal-actors.
Time will tell which strategy fares better.
Footnotes
1.South Korea to regulate cross-border trade of virtual assets,Reuters, Oct. 25, 2024, https://www.reuters.com/markets/asia/south-korea-regulate-cross-border-trade-virtual-assets-2024-10-25/; Soham Jethani, Pankhuri Malhotra & Pooja Unnikrishnan, South Korea's New Era: Virtual Asset User Protection Act 2024 Sets a Bold Standard, TLP Advisors (2024), https://techlawpolicy.com/2024/08/south-koreas-new-era-virtual-asset-user-protection-act-2024-sets-a-bold-standard/
2. Ibid.
3. Ella Fincken, South Korea Pledges Tighter Crypto Regulations, Global Legal Insights(Oct. 25, 2024), https://www.globallegalinsights.com/news/south-korea-pledges-tighter-crypto-regulations/
4. Tom Mitchelhill, South Korea to ramp up oversight of cross-border crypto transactions: Report, CoinTelegraph (Oct. 25, 2024), https://cointelegraph.com/news/south-korea-regulate-cross-border-trade-virtual-assets
5. Ibid.
6. Anna J. Park, Cryptocurrency exchanges to evaluate listed coins, The Korea Times (Jun. 16, 2024), https://www.koreatimes.co.kr/www/nation/2024/11/602_376711.html
7. Jun Ji-hye, Public-private committee dedicated to virtual assets to be launched this month, TheKorea Times(Oct. 13, 2024), https://www.koreatimes.co.kr/www/biz/2024/11/175_384127.html
8. Decentralized Dog, South Korea Reviews Ban on Spot Crypto ETFs Amid Regulatory Changes, Yahoo Finance(2024), https://finance.yahoo.com/news/south-korea-reviews-ban-spot-130943598.html
Originally published November 18, 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
