Takeaways
- The banking partner of two or South Korea’s four major exchanges suggested the exchanges in question suspend cryptocurrency deposits and withdrawals until they become “travel rule” compliant.
- Nothing has been decided, but the bank seems to have the exchanges over the proverbial barrel — if the bank doesn’t renew their real-name bank accounts, the exchanges could face closure. Still, the exchanges could and probably will come up with alternative suggestions.
- Exchanges would maintain Korean won deposits and withdrawals.
- The bank in question says it’s acting independently, but don’t be surprised if the banking partners of South Korea’s other two major exchanges start making similar demands.
- Did we mention that travel rule compliance might be technologically difficult, if not impossible?
- Suspending cryptocurrency deposits and withdrawals at Korean exchanges might consign arbitrage trading on the so-called “Kimchi Premium” to the dustbin of history.
In an exclusive today, Coindesk Korea reported that NH Nonghyup Bank has asked major South Korean cryptocurrency exchanges Bithumb and Coinone to suspend cryptocurrency deposits and withdrawals until they become “travel rule” compliant.
NH Nonghyup Bank provides real-name bank accounts to the two exchanges.
The travel rule?
Recommended by the international Financial Action Task Force in 2019 and subsequently written into Korean law, the travel rule requires exchanges to collect sender and recipient information during cryptocurrency transactions above a certain threshold.
This is controversial within the crypto community for both philosophical reasons (it could go against the spirit of cryptocurrency by rendering anonymous or pseudo-anonymous transactions impossible) and purely practical ones, namely, it might be technologically impossible.
An offer they can’t refuse
In order to receive real-name account certificates from the bank, Bithumb and Coinone can allow only Korean won deposits and withdrawals. Without those certificates, the exchanges cannot register with the financial authorities. Or to be more accurate, they might still be able to register, but would be unable to provide Korean won deposits and withdrawals.
According to Coindesk Korea, NH Nonghyup Bank recently met with Bithumb and Coinone to suggest the suspension of cryptocurrency deposits and withdrawals “as an alternative” to bring the exchanges into “travel rule” compliance.
The bank reportedly argued that since blockchain made it impossible to tell who people exchanging cryptocurrency are, cryptocurrency deposits and withdrawals fail to comply with the “travel rule” set out in South Korea’s revised Financial Transactions Act.
Banks fear money laundering risk
Somebody from the bank — no name given — told Coindesk Korea that the exchanges were mulling over the proposal, and that no decision has been reached. However, he said, should the exchanges continue to allow cryptocurrency deposits and withdrawals, the bank would assume all the risk related to the “travel rule.” And that would mean no real-name account certificates.
He also said NH Nonghyup Bank made the proposal on its own. It was not a request from the Korea Federation of Banks.
Adieu, Kimchi Premium?
According to CoinDesk, NH Nonghyup is worried that cryptocurrency deposits and withdrawals at its partner exchanges expose the bank to unacceptably high risks of money laundering. However, if exchanges block cryptocurrency deposits and withdrawals, arbitrage trading on the so-called “Kimchi Premium” becomes a thing of the past.
Moreover, an industry insider formerly with an exchange told Coindesk that if cryptocurrency deposits and withdrawals are blocked, currency prices become distorted and easily manipulated, driving many investors to other exchanges.
NH Nonghyup Bank has short term deals with Bithumb and Coinone through Sept. 24, the deadline for exchanges to register with the financial authorities.
OK, but how does this affect ICX?
Well, we can’t see how this represents good news for ICX holders. Obviously, it’s not great.
That said, one report in Coindesk Korea does not make an established fact. And even assuming the report is completely accurate, banks and exchanges still have about 40 days to work something out.
If you were looking for a positive spin, it would be that if exchanges were to become “travel rule” compliant by adopting something akin to the SWIFT network of conventional banking, it might encourage existing financial institutions, government organizations and the general public to more fully embrace cryptocurrencies. That would certainly help promote use cases and bolster coin prices, though the ideological problems the “travel rule” presents would remain.
