In January 2018, the Korea Financial Intelligence Unit (“KoFIU”) and the Financial Supervisory Service (“FSS”) conducted a joint inspection of six Korean banks that provide trading accounts for cryptocurrency exchanges. The joint inspection was conducted to collect information and to provide guidance regarding servicing these types of exchanges. The inspection represents a significant step by the Korean authorities to regulate virtual-currency exchanges in one of the most active cryptocurrency markets. According to a report by the BBC, South Korea is the world’s third-largest market for bitcoin trades, behind Japan and the United States. In January 2018, CNBC reported that major cryptocurrencies like bitcoin and ethereum are priced higher in Korea’s exchanges. As an example, the report cited a bitcoin sale on a Korean local exchange, Bithumb, priced at $17,169.65 per token, a 31% premium to the CoinDesk average price. The joint inspection focused on the banks’ anti-money laundering (“AML”) and customer due diligence compliance in connection with the cryptocurrency accounts. The regulators assessed the banks’ controls in the following areas:
- Internal controls and risk assessments;
- Customer due diligence;
- Reporting of suspicious transactions;
- Confirmation that the name of a deposit account holder matches that of a virtual account holder;
- Controls to block transactions in existing accounts if missing customer information is not provided; and
- Controls to block transactions if updated information provided by cryptocurrency exchanges is deemed unreliable.
While the Financial Services Commission (“FSC”) stated that Korean authorities were reviewing a range of possible measures to deal with crimes involving cryptocurrencies, including shutting down the cryptocurrency exchanges, the FSC took no action against the six banks.
Based on the inspection, the FSC issued an “Anti-Money Laundering Guideline Related to Cryptocurrency” (“AML Guideline”) on January 23, 2018. The AML Guideline requires banks to conduct due diligence on its customers who engage in cryptocurrency trading, and enhanced due diligence for high risk customers. For example, the AML Guideline requires banks to confirm whether the cryptocurrency investment came from a virtual account owned by a customer that has an actual account at the bank. In addition, Section 2 of the AML Guideline instructs the banks to conduct enhanced due diligence for customers who are identified as “casino owners, money lenders or currency exchange agencies.” Enhanced due diligence for these customers include on-site inspections.
Section 3 of the AML Guideline sets definitive thresholds for what it regards as suspicious activity. One example is where the transaction amount for a customer is more than KRW 10 million per day or more than KRW 20 million in aggregate for seven days. The suspicious activities specified in Section 3 of the AML Guideline must be reported to KoFIU. Overall, the AML Guideline calls for stronger internal controls and oversight with respect to cryptocurrency exchanges.
On the same day, FSC also released the government’s “Special Measures for the Elimination of Virtual Currency Speculation” (“Special Measures”). Section 2 of the Special Measures states that the purpose of the Special Measures is to eliminate the use of anonymous trading accounts, and require any user of a cryptocurrency exchange to also open a bank account where they intend to use virtual account services with complete beneficial ownership information.
Korea is not the only country in Asia that implemented policies and procedures regarding cryptocurrency. On February 27, 2018, Bank Negara Malaysia, the central bank of Malaysia, has issued an Anti-Money Laundering and Counter Financing of Terrorism Policy for Digital Currencies. The policy sets forth the minimum requirements for entities providing digital currency exchanges and addresses AML control measures in relation to cryptocurrency activities. However, this policy does not have the same weight and authority as the AML Guideline or the Special Measures.
The New York State Department of Financial Services (“NYDFS”) has also taken action regarding cryptocurrency. NYDFS requested that KoFIU and FSS share the data obtained from the joint inspections. An article published by the Russian-English cryptocurrency news resource, CoinFox reported that NYDFS also requested the internal regulations regarding cryptocurrency accounts and account services to South Korean banks that have a presence in New York. According to an article published by the Korean news agency, Chosun Ilbo, a Korean official commented that “[t]here’s a lot of concern from foreign governments about the regulations being imposed on the cryptocurrency trade….With the Korean government conducting on-site inspections and establishing guidelines, financial regulators in New York seem to be gathering information for research purposes.”
While it does not directly correspond with the AML Guideline or the Special Measures issued by the Korean authorities, NYDFS also issued a “Guidance on Prevention of Market Manipulation and Other Wrongful Activity” on February 7, 2018, with respect to the virtual currency business entities licensed by NYDFS (“NYDFS Guidance”). The NYDFS Guidance requires those entities to implement effective measures to detect, prevent, and respond to fraud-related risks, including market manipulation. In addition, a virtual currency entity must submit a written report to NYDFS upon discovering any wrongdoing and follow up reports on any material developments relating to the originally reported events.
The NYDFS Guidance, along with new guidelines in Korea and Malaysia, illustrate the growing concerns about regulating virtual currency exchanges across the world.