South Korea to control money laundering, impose Income Tax on Crypto transactions.

(The Saigontimes) - The cryptocurrency market in South Korea attracts a large number of domestic and foreign investors to participate. Although there is still no direct regulatory framework, the Korean Government has taken a series of measures to protect the interests of investors and gradually institutionalize to bring the operation of this market into the legal framework.

 

So far, there is no direct and fully regulated legal framework to govern cryptocurrencies and crypto-related activities. Cryptocurrency-related activities are still allowed and are not considered illegal unless there is a violation of any applicable laws. Cryptocurrency management policies over the recent period clearly show the cautious and reserved approach of the Government.

 

The legal nature of cryptocurrency is still a question as there is no regulation that explicitly states that it is classified as a currency, asset, or  financial investment product. According to the latest regulations, cryptocurrency is considered a virtual asset, and trading activities related to cryptocurrency are governed by anti-money laundering regulations.

 

In 2020, the Korean National Assembly passed the amended version of the “Act on Reporting and Using Specified Financial Transaction Information” which came into force on March 25, 2021.

 

Accordingly, the law directly regulates obligations concerning money laundering prevention to the service providers related to virtual assets.

 

Cryptocurrency exchanges appeared and spontaneously developed. The market has hundreds of exchanges, but the market share is still concentrated in a few large major cryptocurrency exchanges.

 

In the absence of a direct regulatory framework, cryptocurrency exchanges were formed and operated under a self-regulatory mechanism, self-responsibility, and forced to comply with the current legal framework under the strict supervision of the Government.

 

Notable is the role of the Korea Blockchain Association – a trade association of cryptocurrency exchanges.  The Association has issued self-regulatory regulations that cryptocurrency exchanges as a member have to comply with.

 

Self-regulatory regulations focus mainly on the following aspects: (i) improving transparency of initial coin offering (ICOs); (ii) strengthen the verification of customer information; (iii) compliance with the code of ethics for the managers and employees of crypto exchanges; (iv) protect investors' interests.

 

The Korean Government pays special attention to the transparency of the cryptocurrency trading market, emphasizing the importance of protecting investors and prevention speculation and fraud. Although cautious in promulgating a legal framework to directly regulate the market, the indirect management mechanism has been thoroughly applied, focusing on four main groups of behaviors: (i) indirectly regulating the market through the existing legal framework; (ii) continuously issue press releases to guide, warn and correct the behavior of relevant entities; (iii) supervise, investigate, prosecute and handle violations, frauds, and scams; (iv) study and improve the legal framework to gradually adjust the law related to this market.

 

Specifically, crypto exchanges that are registered to operate as a company, must comply with cybersecurity and regulations about privacy. From 2018, crypto exchanges with a total revenue of more than 10 billion won and having more than 1 million customers must set up an information security management system under the Act on Promotion of Information and Communications Network Utilization and Information Protection.

 

In addition, the issue of customers’ protection is also concerned. In 2018, the Korea Fair Trade Authority conducted a review of the content of user terms and conditions at 12 cryptocurrency exchanges and issued a request to adjust 14 terms and conditions having unfair regulations to consumers according to the Act on the Regulation of Terms and Conditions governing the content of contracts in Korea.

 

The Government has also issued a statement that it will "declare war" and apply criminal and civil sanctions against the violations related to cryptocurrencies, mainly around the following acts: fraud, scam, illegal MLM business; money laundering; illegal transactions. In May 2018, the Korean Court sentenced the head of the company to seven years in prison and four years in prison for a company board member who engaged in illicit MLM activities related to cryptocurrencies with fraud charges.

 

 

 

A clear shift in the regulation of the cryptocurrency exchange market is the regulations on anti-money laundering and imposing Income Tax on cryptocurrency transactions.

 

In 2020, the Korean National Assembly passed an amended version of the Act on Reporting and Using Specified Financial Transaction Information” which came into force on March 25, 2021. Accordingly, the law directly regulates obligations concerning money laundering prevention to the service providers related to virtual assets, including cryptocurrency exchanges. The three main obligations that crypto-related service providers (crypto exchanges) must meet include:

 

Firstly, crypto exchanges, whether established or about to be established, will report to the Korea Financial Intelligence Unit the following information: Company name and legal representative; Company address, contact information (including e-mail address, website domain name, server information and other information if required); Company rules; Business plan; Certification of information protection management system; Information on trading accounts by real name; And other documents if required.

 

In particular, people who are penalized with fines or more for violations of the law related to financing, investment, or foreign exchange transactions... within five years from the date of judgment execution will not be the representative or the manager of the company. This is also considered as a condition in the granting of a business license.

 

Second, it is required that all cryptocurrency transactions be done through a bank account with the real name of the trader, and crypto exchanges have an obligation to prevent money laundering arising from/to such transactions. Specifically, crypto exchanges must confirm the bank account information of traders. If investors do not register to trade under a real-name bank account, they will not be able to trade and that crypto exchange has the right to refuse such transaction if there is any doubt about the origin of the investor's money.

 

By September 24, 2021, at the latest, if crypto exchanges fail to synthesize the bank account information registered with the real name of the traders, such exchanges will be forced to close. This move is considered to help minimize illicit transactions in the cryptocurrency market because, in Korea, there are currently only four major cryptocurrency exchanges, Bithumb, Upbit, Coinone, and Korbit, which regulate the registration with the real name of traders, meanwhile, other small exchanges accept indirect investment only through exchange's accounts.

 

Thirdly, crypto exchanges have an obligation to prevent money laundering, in case there is a suspicious transaction related to money laundering, crypto exchanges must report to the Financial Service Commission of Korea (FSC), or if required, crypto exchanges must provide full information on the transaction record of such suspected trader.

 

If crypto exchanges violate their obligations related to anti-money laundering, they can be fined up to 50 million won or imprisoned for up to five years.

 

 

In addition to tightening the information management related to cryptocurrency transactions, the National Assembly of Korea has passed the revised Income Tax Law effective from January 1, 2021, specifically regulating taxes on the profit from cryptocurrencies in Korea to prevent tax evasion.

 

Accordingly, income arising from buying, selling, giving, and inheriting cryptocurrencies is considered “other income” and taxed according to regulations for “other income”. That is, traders will be subject to a tax of 20% on the income from cryptocurrencies trading in excess of the allowed limit of 2.5 million won/year from January 1, 2022. In addition, if the profit from cryptocurrencies is less than 2.5 million won/year, this income tax will be waived.