Cryptocurrency Regulations in South Korea: What You Need to Know

Key Takeaways

• South Korea enforces a strict regulatory framework requiring compliance with KYC/AML guidelines, pushing exchanges to meet these standards.
• South Korea’s comprehensive regulatory environment is primarily overseen by the Financial Services Commission (FSC).
• The “Kimchi Premium” phenomenon, where cryptocurrency prices are often higher in South Korea than in other markets, highlights the country’s significant local demand for digital assets.
• The regulatory environment is evolving, with ongoing discussions about potential changes to the tax regime, including delays in implementing the 20% tax on crypto gains.

South Korea is a leading technology hub, embracing digital developments for decades. Supported by a strong economy and a tech-savvy population, it’s no surprise that the country has become a key player in digital assets. 

The Social Capital Markets  report recognized South Korea, along with Dubai and Switzerland, as one of the most crypto business-friendly countries in 2024.

The country has also hosted cryptocurrency conferences, such as Korea Blockchain Week 2024 and the Deconomy Forum, which captured the attention of industry leaders and enthusiasts.

Major exchanges like Upbit, which holds 80% of the market share, and Bithumb, which briefly captured 72% in early 2024, dominate the crypto trading scene, and both contribute significantly to global trading volumes.

However, despite its advancements and leading role, South Korea’s regulatory environment imposes significant restrictions on cryptocurrency, creating a complex but dynamic landscape.

Understanding this rich and complex scenario is essential for anyone involved in cryptocurrency. This article will explore South Korea’s crypto regulations, market dynamics, and recent developments in the space, offering a comprehensive view of this thriving but regulated market.

Current Legal Framework for Cryptocurrencies

The landscape of crypto regulation in the country has evolved with the following key events in recent years:

• 2021: The Special Financial Information Act (also known as the Act on Reporting and Using Specified Financial Transaction Information), in place since 2021, plays a crucial role in regulating the crypto industry, primarily through anti-money laundering (AML) obligations. 
• 2022: The South Korean government formed a joint public-private task force to develop a more robust regulatory framework. This task force aimed to establish phased regulation, promote consistency, and align South Korea’s crypto regulations with global standards​.
• 2023: South Korea’s Financial Services Commission (FSC) introduced the Act on the Protection of Virtual Asset Users (VAUPA), an amendment to the Special Financial Information Act.
• 2024: The VAUPA came into effect on July 19, 2024. This law focuses on safeguarding the assets of virtual asset users, preventing unfair practices in the virtual asset market, and granting the FSC comprehensive oversight and enforcement powers. 

The FSC can supervise, inspect, and penalize virtual asset service providers (VASPs).

VASPs include cryptocurrency exchanges, wallet providers, and various platforms specializing in digital asset services, including transactions and storage. These entities must comply with strict rules, such as keeping at least 80% of users’ assets in cold wallets to protect against hacking and system failures​.

Violation of these rules can result in penalties ranging from fines up to five times the amount of unfairly gained profits to imprisonment, depending on the severity of the violation. 

Registration and Compliance for Crypto Exchanges

The collaboration between banks and exchanges is a crucial aspect of South Korea’s crypto regulation.

• Registration with FSC: Crypto exchanges must register with the Financial Services Commission (FSC) to operate legally.
• Real-name verification: Exchanges need to collaborate with local banks to provide real-name verification accounts for their users.
• KYC and AML: Exchanges must implement Know Your Customer (KYC) and AML procedures to verify user identities and monitor transactions.
• Penalties: Failure to comply with these regulations can result in severe penalties, including closures and sanctions.

The Electronic Financial Transactions Act and the Act on Reporting and Use of Specific Financial Information form the backbone of these regulations, defining cryptocurrencies as “electronic assets” and outlining rules for their use.

In August 2024, South Korea’s Financial Services Commission (FSC) took action against 16 foreign cryptocurrency exchanges operating without proper registration. These exchanges violated the Specific Financial Information Act by offering services to Korean users without following the required legal framework. The list of sanctioned exchanges is the following: 

• MEXC
• KuCoin
• CoinW
• CoinEX
• ZB.com
• Bitglobal
• Bitrue
• Poloniex
• BTCEX
• Phemex
• XT.com
• Pionex
• BTCC
• DigiFinex
• AAX
• ZoomEX​

Taxation of Cryptocurrencies in South Korea

As of August 2024, South Korea’s 20% tax on cryptocurrency profits has been delayed again. It was initially set for 2023, later postponed to 2025, and further delayed until 2028. 

The tax would apply to crypto profits exceeding 2.5 million won (around $1,800). However, concerns about the market’s volatility, the lack of a proper tax infrastructure for tax collection, and fear that imposing the tax too soon could harm investor sentiment have incentivized lawmakers and several members of South Korea’s ruling People’s Power Party to reconsider the timeline.

South Korea’s Stance on ICOs and STOs

South Korea’s stance on Initial Coin Offerings (ICOs) and Security Token Offerings (also known as STOs,  a method of raising funds by issuing tokens, is cautious yet innovative, with a tendency to support STOs over ICOs. The future of both depends on developing a robust regulatory framework, which is currently in progress. The key aspects related to them are as follows:

ICOs:

• Ban in place: South Korea banned ICOs in 2017 due to fraud and market manipulation concerns.
• Ongoing discussions: Talks are underway about potentially lifting the ban, with proposals for a regulated framework to ensure transparency and investor protection​.

STOs:

• Favorable approach: South Korea views STOs more positively, recognizing their potential in blockchain.
• Regulations in progress: The government is working on creating regulations to allow STOs under the Capital Markets Law.
• Expected legalization: STOs are expected to become fully legal and play a significant role in South Korea’s blockchain strategy​.

What Is Kimchi Premium?

Like kimchi, a traditional Korean fermented food with a savory flavor, the Kimchi Premium in the cryptocurrency market refers to something unique in the country. The Kimchi Premium happens when the price of cryptocurrencies like Bitcoin is higher on South Korean exchanges than in the rest of the world. 

This price difference results from the strong local demand for crypto and certain restrictions that make it hard for individuals to buy crypto in other countries and sell it in Korea. For example, Bitcoin has sometimes traded 20-30% more in South Korea than in global markets.

Understanding the Kimchi Premium in South Korea illustrates the country’s unique approach to regulation. The premium is partly a result of the country’s strict financial controls and local demand, which are directly influenced by government policies.

Key Provisions of the Act on Reporting and Use of Specific Financial Information

The amendment to the Special Financial Information Act introduced significant measures to regulate and safeguard the virtual asset sector, focusing on three key areas:

User Asset Protection Rules for VASPs

The Act sets forth User Asset Protection Rules for VASPs. Firstly, it requires the separation of customer transaction deposits from VASP assets, ensuring distinct storage of customers’ virtual assets. VASPs are also mandated to hold the types and quantities of virtual assets entrusted by users, with a significant portion in cold wallet storage, the details of which will be specified in a presidential decree.

Additionally, VASPs must have insurance or reserves for hacking or network failures and maintain transaction records for fifteen years for tracking and verification purposes.

Regulations on Unfair Transaction Activities

The second major aspect of the Act concerns Regulations on Unfair Transaction Activities. These include prohibiting undisclosed material information, manipulating market prices, and engaging in fraudulent activities such as false reporting.

VASPs are also restricted from trading self-issued virtual assets and must monitor and respond to abnormal activities, like transactions with extreme price or volume volatility. Furthermore, they are required to report suspicious transactions to financial and investigative authorities.

Supervisory and Sanctions Authority to The FSC

Finally, the Act grants the FSC supervisory and Sanctions Authority. Under this provision, unfair transaction activities are subject to stringent penalties, including a minimum of one year of imprisonment or fines ranging from three to five times the amount of illicitly gained profits.

Additionally, the Act allows for confiscating gains from unfair activities or collecting an equivalent amount in cases where direct confiscation is not feasible.

Future of Cryptocurrency Regulations in South Korea

The future of cryptocurrency regulations in South Korea will likely involve balancing innovation and consumer protection. As the crypto market grows, South Korea’s government is expected to continue tightening regulations while fostering technological development in various areas. Some key elements include:

• International collaboration: South Korea may collaborate with other countries and international organizations to develop harmonized regulatory frameworks for the cryptocurrency industry.
• Adaptability: The regulatory landscape must be adaptable to keep pace with the rapidly evolving crypto market and emerging technologies.
• General awareness: Increased efforts to educate the public about the risks and benefits of cryptocurrencies will be essential.

Additionally, developing innovative solutions and advanced security measures can help mitigate risks and enhance consumer protection.

Conclusion

South Korea is a technological hub for various developments, including cryptocurrency. The country’s regulatory history has seen numerous changes and delays, reflecting a long trajectory of evolving crypto regulations. 

The “Kimchi Premium” highlights the importance of crypto in a nation deeply reliant on technology and blockchain. While South Korea may face stricter regulations in the future, it also holds significant opportunities for growth in the crypto space. 

Time will tell, but South Korea continues to play a leading role in shaping the global cryptocurrency landscape.

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