South Korea remains the third-largest crypto exchange market by volume, just behind the United States and Japan. Despite that, throughout the past three years, the government of South Korea has opted against fully regulating the local crypto market.
In the second half of 2019, the government of South Korea started to work on several bills that would further legitimize the crypto sector and allow it to evolve into an established industry.
Below is the complete timeline of the passing of bills and controversy surrounding the regulatory side of crypto in South Korea since 2017, and what is expected to come in the future.
Timeline of regulation and controversy regarding crypto in South Korea
July 3, 2017:
Park Yong-jin, a member of the National Policy Committee from the ruling Democratic Party, introduced the first-ever taxation policy for crypto. Park proposed the imposition of transfer tax, not capital gains tax, on cryptocurrency trading.
July 31, 2017:
Park Yong-jin introduced the Electronic Financial Transactions Act that was ultimately passed on Oct. 19, 2017, which covered cryptocurrencies. The regulatory framework tightened Know Your Customer and Anti-Money Laundering policies around crypto.
Sept. 1, 2017:
The government of South Korea, in cooperation with the Financial Services Commission, established a task force to explore the transparency of cryptocurrencies and regulatory frameworks surrounding the asset class.
Dec. 4, 2017:
December 2017 was when controversy, uncertainty, and, therefore, the involvement of the South Korean government in regulating cryptocurrencies reached a peak.
As a result, the Ministry of Justice revealed that it is forming a cryptocurrency regulation task force with the intent of implementing stricter guidelines for trading. The Ministry of Justice, Ministry of Economy and Finance, Financial Services Commission and several other agencies contributed to the task force.
Dec. 11, 2017:
As the Bitcoin (BTC) price started to see an explosive rally amid increasing speculation, the government started to hint at a full ban on cryptocurrency trading. Choi Jong-gu, the head of the Financial Services Commission, said in a press conference that the commission is looking into the possibility of imposing a comprehensive ban on crypto trading.
Choi’s statement was the start to a highly controversial month for crypto and the government of South Korea. Different agencies and commissions were expressing a contrasting stance toward cryptocurrency regulation, and it led to the intervention from the Blue House, the official office of South Korea’s president.
Jan. 11, 2018:
Controversy and outrage regarding the government’s lack of direction in regulating the cryptocurrency market hit when former Justice Minister Park Sang-ki said that a bill to ban cryptocurrency exchanges was coming. He said that there is no difference in opinion between the Ministry of Justice and the Financial Services Commission.
However, almost immediately after the statement of former Minister Park, the Blue House said that nothing is set in stone, essentially refuting the statement of Minister Park.
Jan. 15, 2018:
The government clarified that it does not plan to enforce a ban on cryptocurrency trading or exchanges. But it emphasized that it will tighten policy regarding market manipulation, money laundering and tax evasion.
Jan. 16, 2018:
In a State Council meeting led by President Moon Jae-in, the controversial statement of former Minister Park from a week prior was mentioned. The meeting concluded that Park’s statement was premature, and there was no formal agreement between the Ministry of Justice and the Financial Services Commission.
Feb. 18, 2018:
A seminar was conducted with members from the ruling Democratic Party (People’s First Party) and the opposing Liberty Korea Party to discuss cryptocurrency regulations. The attendees concluded that there is a clear need to lessen confusion around cryptocurrencies and to further evolve the blockchain space into a fast-growing industry.
July 26, 2018:
Since the formal establishment of a cryptocurrency task force in December 2017, no major progress or bills were proposed. It led to criticism from the media, cryptocurrency investors and companies that claimed the government was implementing a hands-off approach once again.
Oct. 16, 2019:
Fueled by growing regional initiatives from major cities like Seoul and Busan, the blockchain industry of South Korea started to see rapid growth.
Specifically, describing blockchain as a key technology in the Fourth Industrial Revolution, South Korean Finance Minister Hong Nam-ki revealed the National Development Plan for Digital Trade. He cited blockchain as an important technology for the new initiative.
Nov. 26, 2019:
After almost a full year of silence from the government of South Korea, a new bill that would provide cryptocurrencies a legal foundation in the years to come was pushed forward. South Korea’s National Assembly’s national policy committee approved a bill that would allow cryptocurrencies to obtain legitimacy through transparency and stricter oversight.
Dec. 9, 2019:
The Ministry of Economy and Finance said that it plans to move forward with imposing taxes on cryptocurrency trading and is in the process of creating a bill for it. The National Assembly Budget Office said:
“Income that is generated from businesses around cryptocurrency trading facilitation, payments processing, and mining can be taxed as business income tax or corporate tax. It is also viable to tax profits from trading cryptocurrency as transfer tax so there is a necessity to change tax laws appropriately.”
Dec. 30, 2019:
The local media criticized the controversial move of the National Tax Service when it hit Bithumb crypto exchange with a whopping $70 million bill for trades it facilitated for foreign users before the ban on foreigners trading cryptocurrencies in South Korea was imposed by the government.
Hankyung, a mainstream business publication, said the government first has to provide standards for cryptocurrency taxation before going after companies and individuals.
What can investors and companies expect in 2020 and beyond?
Based on media reports and the comments of industry executives as well as cryptocurrency investors, the past three years have been frustrating for almost everyone in the local cryptocurrency exchange market.
Two top exchanges — Bithumb and UPbit — were hacked; progress on crypto regulation by the government lagged; and volume across the board fell quite substantially. Moreover, the government has not made clear steps on regulation for three years, and it is only in 2020 that major areas such as taxation are being addressed.
Throughout the past six months, it has been evident that the government of South Korea has been generally following the direction on Anti-Money Laundering procedures set forth by the Financial Action Task Force, a financial watchdog under the G-7.
With the government’s existing focus on money laundering prevention, which has been addressed extensively by the adoption of FATF’s guidelines by South Korea, companies and individuals can expect a standardization of taxation policies in 2020.
Taxes around crypto and a framework for the National Tax Service to collect taxes with a clear legal basis are likely to be the main narrative of cryptocurrency regulation in South Korea over the next two years. An executive of South Korea-based crypto platform Tokeny, Heslin Kim, told Cointelegraph:
“Thus far, we’ve seen Korean legislators benchmarking other countries for their crypto regulation. Japan has announced they will have their diet fully passed by March/April, and I would assume Korea will wait to see what Japan does before finalizing any decisions. There have been announcements of pending regulation since November 2017, and we have yet to see anything passed. I would not be surprised if we did not see anything passed until at least Q3–Q4 2020.”
For most activities regarding cryptocurrencies such as trading, the government has been relatively lenient, even with the ruling Democratic Party’s cautious stance toward crypto regulation. The opposing Liberty Korea Party has consistently demonstrated a pro-crypto stance and, as such, no big shifts in the government stance are likely to be shown in the years to come.
Stability in cryptocurrency trading is unlikely to change
Despite controversial statements in the past regarding a ban on cryptocurrency trading, since 2018, crypto exchanges have been allowed to operate with relative stability in their operations. Major banks, like Shinhan and Nonghyup, have provided virtual banking accounts to top exchanges such as UPbit and Bithumb. Thus, the most widely utilized crypto exchanges in South Korea do not and have not suffered from a lack of banking service support.
Strengthening AML requirements could be a bigger burden for exchanges in the short-term, but top exchanges have been proactive in preventing money laundering since major hacking attacks hit the local market in early 2018. On the matter, Kim added:
“Tightening KYC/AML requirements has not impacted the exchanges as much as the banking restrictions that were put in place in early 2018. There are now only a few major exchanges with fiat off ramps, and this was one of the biggest reasons the Korean market was slowed so heavily. The market is rather stable now, but volume is still poor.”
UPbit, Bithumb and others created a hotline in place to prevent hacked funds or suspicious transactions from exiting exchanges to ensure that the government and cybersecurity agencies can carry out comprehensive investigations.
UPbit, in particular, went as far as to proactively delist privacy cryptocurrencies on its platforms after the Japanese government required local trading platforms to delist Monero (XMR), Zcash (ZEC) and Dash (DASH).
Large-scale exchanges like UPbit and Gopax also have dominant, multi-billion-dollar conglomerates such as Dunamu-Kakao and Shinhan Bank as either investors or parent companies, which further legitimizes the local cryptocurrency exchange market.