Since the FATF recommendations were issued in June, concerns have grown over the institutionalization of cryptocurrency. Korea is no exception. While the grace period given to enact the recommendations confirmed by the FATF General Assembly is one year, the passage of the revised act on the Reporting and Use of Specific Financial Transactions Information (aka the Special Act) is remote.
The revision, proposed by Rep. Kim Byung-wook of the Minjoo Party of Korea in March, reflects the FATF’s recommendation, which sets stricter standards for anti-money laundering (AML) and anti-terrorism funding (CFT), including the registration system for cryptocurrency exchanges (VASPs). Lee Tae-hoon, director of planning and administration at the Financial Intelligence Unit (FIU), said, “If the revision is passed, it will be more effective than indirect regulation through the current guidelines, and virtual asset transparency will be enhanced.”
If the Special Act is passed and cryptocurrency exchanges are legislated, the system will also be able to foster cryptocurrency transactions. However, the blockchain industry is expressing its concern, saying that the contents of the proposed Special Act revision are ‘unrealistic.’
Why do they think it’s not realistic?
The Act will reflect the FATF’s recommended ‘travel rules.’
*What are the travel rules?
The travel rules state that information needs to be checked and inspected wherever the money is circulated, as information about the counterparty must be known at the same time as identifying the transaction generator (customer). Exchange and cryptocurrency companies must exchange customer information with each other to verify the identity of customers. These are new regulatory standards that go beyond the existing KYC process.
The problem is that there is virtually no way for VASPs, such as exchanges, to cross-check customer information. Unlike IBAN, which is used by banks to send and receive money, crypto wallet addresses change to a string of meaningless numbers and characters during the encryption process. Also, as anyone can create an encrypted wallet, it’s difficult to identify the owner or anyone involved in the process.
The FATF, in its June recommendation, has required member states to implement legislation and system maintenance within a year. It can also investigate the implementation of member states in June 2020 and impose restrictions on those countries that fail to meet the standards. In the worst case, certain countries may be alienated from the international financial system. Will an effective law be passed in the time remaining, despite the delay in parliament, along with protests from businesses that the special law clashes with its standards?