South Korea has positioned itself as a major hub for virtual currency activity, ranking among the top global markets alongside Japan and the United States. This prominence, however, brought challenges, including a previously low barrier to entry for exchanges, which led to a fragmented market with varying levels of reliability and security.
In response, the Korean government has implemented a comprehensive regulatory framework designed to bring clarity, security, and legitimacy to the virtual asset industry. This article explores the key laws and industry measures shaping the landscape of virtual currencies in South Korea.
Legal Framework and Regulatory Evolution
South Korea's journey toward formal virtual currency regulation began in 2017. The government took decisive steps to curb speculation and establish order in the burgeoning market.
Initial Measures (2017-2018):
- September 2017: The Financial Services Commission (FSC) announced a comprehensive ban on Initial Coin Offerings (ICOs).
- December 2017: Government sub-cabinet meetings resulted in the creation of "Special Measures to Prevent Virtual Currency Speculation."
- January 2018: The FSC implemented a real-name trading system, requiring all virtual currency exchanges to partner with banks to convert existing virtual accounts into real-name verified deposit and withdrawal accounts.
- February 2018: A strict ban was imposed, prohibiting all government public officials from holding or trading virtual currencies, regardless of any relation to their official duties.
The Specific Financial Transactions Information Act (特金法)
A significant milestone was reached on March 5, 2020, when the South Korean National Assembly passed the Specific Financial Transactions Information Act (特金法). This law brought cryptocurrencies out of a regulatory grey area and provided a systematic legal foundation.
The Act has three primary objectives:
- Preventing Financial Crime: It defines the reporting requirements for specific financial transactions to combat money laundering and terrorism financing, aiming to establish a sound and transparent financial order.
Defining Virtual Asset Businesses: The Act formally defines a "Virtual Asset Service Provider" (VASP) as a company engaged in any of the following activities:
- The sale and purchase of virtual assets.
- The exchange of virtual assets between different forms.
- The transfer of virtual assets, as specified by presidential decree.
- The custody or management of virtual assets.
- Acting as an intermediary, broker, or agent for the activities above.
It also defines a "virtual asset" as an electronic token that has economic value and can be traded or transferred electronically.
Enforcing Customer Verification (KYC): The Act mandates strict customer due diligence. Banks and financial companies must refuse to open an account or provide services if:
- A client refuses to provide information for identity verification (KYC).
- A client refuses to fulfill their reporting obligations, or if their report is not accepted or is withdrawn.
- A client is deemed to pose a particularly high risk of money laundering or terrorist financing.
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Industry Self-Regulation and Oversight
Complementing government legislation, the industry has also taken steps to promote best practices. The Korea Blockchain Association (KBA), established in 2018, is a self-regulatory body that conducts reviews and audits of its member cryptocurrency exchanges. This includes major platforms like Bithumb and Upbit, fostering a higher standard of operation and consumer protection within the industry.
Major Virtual Currency Exchanges in South Korea
The regulatory changes have consolidated the market, with only exchanges meeting strict requirements—including ISMS certification and a real-name bank partnership—being permitted to operate. The following are some of the leading platforms that have navigated this new environment.
Bithumb
Founded in 2014, Bithumb is one of Korea's earliest and largest cryptocurrency exchanges. It is a dominant force in the Korean market, particularly for Ethereum, where it has historically captured a significant majority of the domestic trading volume. Beyond trading a wide variety of virtual currencies, Bithumb has expanded its business to include services like overseas remittance and payments, evolving into a comprehensive financial platform built on digital assets.
Upbit
Launched in 2017 through a partnership between Korean fintech company Dunamu and U.S. exchange Bittrex, Upbit experienced rapid growth. Its strong technological foundation and extensive selection of assets quickly made it one of the largest and most trusted exchanges in South Korea, known for its robust security measures and user-friendly interface.
Coinone
Also established in 2014, Coinone is another major player in the Korean exchange market. It was an early adopter of the BTC/KRW trading pair. Coinone has distinguished itself by innovating in customer service; it was one of the first exchanges to install a Bitcoin ATM in South Korea, which not only displays real-time market information but also provides face-to-face consulting services for users.
Frequently Asked Questions
What is the Specific Financial Transactions Information Act (特金法)?
It is the cornerstone of South Korea's virtual asset regulation. Passed in 2020, it provides the legal framework for governing cryptocurrency exchanges, defining them as Virtual Asset Service Providers (VASPs). Its main goals are to prevent money laundering, enforce strict customer KYC checks, and bring legitimacy to the industry.
How do I know if a Korean cryptocurrency exchange is compliant?
A compliant exchange in South Korea must have two key certifications: the Information Security Management System (ISMS) certification and a real-name account partnership with a Korean bank. These exchanges are officially registered with the Financial Services Commission (FSC) and are subject to regular audits and oversight.
Can foreign investors use South Korean exchanges?
Access for foreign investors can be complex due to the real-name bank account requirement, which is typically tied to a Korean resident registration number. Most major exchanges primarily serve domestic residents. Foreigners interested in the Korean market often need to use international platforms or seek specific channels that cater to non-residents.
What was the impact of the real-name trading system?
The real-name system, introduced in 2018, was a transformative policy. It drastically reduced anonymous trading, directly linking all exchange transactions to verified bank accounts. This greatly enhanced the government's ability to monitor for illicit activities, protect consumers, and tax capital gains, making the market more transparent and secure.
Are all cryptocurrencies legal in South Korea?
While the trading of major cryptocurrencies like Bitcoin and Ethereum is legal on licensed exchanges, the legality of specific tokens can be fluid. The FSC and exchanges regularly review and sometimes delist tokens that are deemed high-risk or non-compliant with evolving regulations. The initial coin offering (ICO) ban also remains largely in effect.
How does South Korea's approach compare to Japan's?
Both Japan and South Korea have proactive regulatory frameworks that require mandatory licensing for exchanges. A key difference lies in their initial response; Japan moved toward licensing earlier following major exchange hacks, while South Korea's framework crystallized later with the 特金法. Both nations now emphasize security, consumer protection, and anti-money laundering measures.