The partial amendment to the Act on Reporting Specified Financial Transaction Information (the "Partial Amendment") will become effective on March 25, 2020 and this will establish regulatory oversight over certain virtual asset service providers ("VASPs") in Korea.
The Financial Services Commission (the "FSC") published the draft amendment to the relevant Enforcement Decree (the “Enforcement Decree) on November 3, 2020, and the draft amendment to the Regulation on Reporting and Using Specified Financial Transaction Information (the "Regulation") and the Manual for VASP Reporting (the "Manual") on February 18, 2021 to supplement the Partial Amendment.
Some key developments based on the Regulation and the Manual are as follows:
1. Application to Major VASPs
The Manual states that only "major" VASPs ("Major VASPs"), such as virtual asset exchanges, custody service providers and wallet service providers, will be required to submit a VASP report ("VASP Report") to the Financial Intelligence Unit of Korea ("FIU"). Further, it is likely that the AML requirements under the Partial Amendment will apply only to the Major VASPs based on the recent FSC press releases.
The VASP Report filing requirement will also apply to foreign Major VASP whose offshore activities, such as cross-border virtual asset transactions, "affect" Korean customers. It remains unclear, however, how the regulatory authorities will enforce the Partial Amendment to a foreign Major VASP.
2. Form VASP Reports Available
The Manual includes form VASP Reports for domestic Major VASPs and foreign Major VASPs. For a foreign Major VASP, it must provide (i) a Korean business address and contact information and (ii) the real name and nationality of the representative director who resides in Korea. The Manual reiterated the Partial Amendment’s requirement for (a) an Information Security Management System certification by the Korea Internet & Security Agency and (b) a real name deposit or withdrawal account for financial transactions with its customers (in cases where a VASP provides services for conversion between fiat currency and cryptocurrency).
As a result, foreign Major VASPs will likely need Korean business address and personnel resident in Korea to engage in virtual asset exchange, custody or wallet services with Korean customers. Foreign Major VASPs should closely monitor the Korean regulatory authorities’ enforcement approach to the Partial Amendment once the Partial Amendment becomes effective.
3. Exception to No-Collaboration Rule
The Enforcement Decree states that a VASP must not "collaborate" with another VASP and thereby allow their respective customers to transact. However, the Regulation adds an exception to this "no-collaboration rule" that, so long as the relevant VASPs comply with the AML obligations under the Partial Amendment and have access to the other VASP customers' information, their collaboration will be permitted. This exception would likely allow the practice of "order book sharing" to a limited extent.
4. Others
The Regulation (i) exempts a Major VASP that does not provides services for conversion between fiat currency and virtual assets from the requirement for a real-name verified bank account, and (ii) forbids transactions with so-called "dark coins" (also known as privacy coins) that hides data about its users and origins of their transactions when transferring the token from one address or account to another.
According to the Manual, the Financial Supervisory Service will be responsible for substantive review of each VASP Report from the Major VASPs. Procedurally, however, a Major VASP must file a VASP Report to with the FIU.
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