Coindesk Korea’s Han Seo-hui attempted Thursday to summarize Korea’s laws and regulations regarding cryptocurrency… such as they are.
Firstly, she notes that Korea’s cryptocurrency regulations hardly changed in the first half of 2019. Though the authorities adopted administrative measures in 2017 and 2018, no laws have been enacted since then regarding cryptocurrency fund raising or the operation of cryptocurrency exchanges.
KYC, AML regulations
Since there’s little in the way of concrete laws, CoinDesk Korea instead looks at administrative regulation. They begin with Korea’s best known cryptocurrency regulation, the guidelines against virtual currency-related money laundering implemented by the Financial Services Commission (FSI)’s Financial Intelligence Unit on Jan. 30, 2018.
Those guidelines lay out the roles and responsibilities of places that handle virtual currencies such as cryptocurrency exchanges and financial companies such as banks. The guidelines also stipulate that when financial companies report their transactions to the FIU, they should include material on the transaction and evidentiary material, something that serves as an indirect regulation on cryptocurrency exchanges.
Major exchanges such as Bithumb, Upbit, Coinone and Korbit had bank-issued real-name virtual accounts before the guidelines were issued. Since the guidelines were issued, however, banks have refused to issue new real-name virtual accounts, citing said guidelines. The guidelines also call on banks to immediately refuse or terminate a transaction if an exchange refused to provide information about a customer or provides untrustworthy information.
The FSI amended its guidelines on July 10, 2018. These guidelines, which were supposed to last a year, had been scheduled to be replaced by an amended Act on Reporting and Using Specified Financial Transaction Information. Amending that law has been delayed, however, so the FSI recently decided to extend the guidelines.
ICO and STO Regulations
On Sept. 29, 2017, a governmental joint task force on virtual currencies said that ICOs using virtual currencies that take the form of issuing securities such as equity or debt securities violate capital market laws. Though this was nothing more than a piece of administrative guidance issued in the form of a guideline, not one company has tried to challenge it by locally holding an ICO.
The Financial Supervisory Service on Sept. 22, 2018 began investigations into the ICOs of 22 companies. A pan-governmental task force on virtual currencies operating under the Office for Government Policy Coordination announced the results of those investigations on Jan. 31, 2019. The government called on people to exercise caution in investing in ICOs, calling them highly risky.
Nonetheless, Korea has yet to enact a law that clearly regulates domestic ICOs.
Accordingly, ICOs and IEOs are in fact possible under the current circumstances. You just need to stay clear of violating any existing laws. That means during your sale, you should avoid violating the Door to Door Selling Act or laws pertaining to fund-raising without permission. In particular, you should avoid including false information in your business statement.
False information could get you busted for criminal fraud, while recklessly using the funds you raise could get you charged with criminal embezzlement. Additionally, if the cryptocurrency you issue takes the form of something like electronic prepayment, you should confirm whether you need to register or approve it under electronic finance laws.
STOs, meanwhile, face several limitations as they must accord with the strict regulations of capital market laws.
Foreign exchange regulations
If you held your ICO outside of Korea, you could still fall afoul of foreign exchange transaction laws. Since domestic projects are usually developing systems, the overseas legal entities that issue cryptocurrency for an ICO often must remit funds back to Korea. When they do this, they must sometimes report those transactions under foreign exchange transaction laws. Realistically speaking, however, if you remit funds using cryptocurrency, it’s unclear whether authorities would process those funds even if they are reported in full accordance with the foreign exchange transaction laws.
Then there’s the question of VATs, income taxes, corporate taxes, inheritance taxes and gift taxes.
Firstly, no clear conclusion has been reached on whether cryptocurrency is subject to VATs. The National Tax Service has issued an opinion that when it circulates as a currency, cryptocurrency isn’t subject to a VAT, but when it’s transacted as a storage of property value, it could be subject to a VAT. Accordingly, you can’t really say cryptocurrency is subject to a VAT, at least until the legal character of cryptocurrency is defined.
Income taxes are applied only to the taxable articles listed in the Income Tax Law. In the case of business income, there are no articles pertaining to cryptocurrency. That said, in the case of income made from activities that conform to business, it’s best that you report it. Moreover, wages paid in cryptocurrency rather than cash could be taxed as earned income.
Income earned from the transfer of cryptocurrency, however, is not taxed – transfer income taxes are applied only in the cases stipulated by the law, and said law contains no stipulation regarding cryptocurrency transfers. Corporate taxes, on the other hand, adopt a comprehensive taxation base. If net corporate assets increase through cryptocurrency, it could be subject to corporate taxes.
Cryptocurrency exchange regulations
Currently there are no laws that directly regulate cryptocurrency exchanges. A revision to the Act on Reporting and Using Specified Financial Transaction Information proposed by a lawmaker from Korea’s ruling Democratic Party in March stipulated a report system for cryptocurrency exchanges. That report system, however, would be a de facto permit or registration system since the reports would have to be accepted.
If Korea’s parliament passes that revision, it appears that ISMS-certified exchanges that use real-name virtual accounts will be able to operate legally if they report themselves. Up till now, anyone could open up and operate an exchange since no licensing system exists. Going forward that could change, however.
Even if you don’t need a permit to open an exchange under current laws, you still need to take into consideration local laws regarding terms of agreement and personal data protection.
Moreover, as a cryptocurrency exchange is a service provided through the internet or a mobile communication network, the exchange operator is considered an information and communication service provider under the Act on Promotion of Information and Communications Network Utilization and Information Protection, Etc.
Which means that law and its provisions apply to you.
Now, the FAFT announced its advisory regarding cryptocurrency in June. In Korea, this advisory will likely be reflected into law. The FAFT advisory calls on cryptocurrency exchanges to be subject to KYC and AML requirements. Accordingly, local cryptocurrency exchanges are likely to be subject to mandatory KYC and AML requirements, too.