On March 5, local media reported that the National Assembly of South Korea had passed an amendment to the Special Financial Transactions Act. The legislation is set to take effect one year after approval, meaning it will be implemented in March 2021.
This revised law introduces a licensing system for cryptocurrency exchanges and requires banks to support real-name account registration for these platforms. This development marks a significant milestone: virtual assets are now formally recognized as legal, and cryptocurrency exchanges are officially classified as financial institutions. Previously, these exchanges were categorized as information providers rather than financial entities.
Understanding the Special Financial Act Amendment
The amendment aligns with certain implementation standards recommended by the Financial Action Task Force (FATF) and follows the "FIU Virtual Currency Anti-Money Laundering Guidelines" established by South Korea’s Financial Intelligence Unit (FIU), which operates under the Financial Services Commission (FSC).
The FIU will continue to develop subordinate regulations and other measures to ensure the smooth implementation of the amendment. Government agencies will also actively gather opinions from the cryptocurrency industry and private experts.
According to the revised law, virtual asset operators must assume obligations to prevent money laundering. It also specifies requirements that financial companies must adhere to when engaging in financial transactions with these operators.
Key Provisions of the Act
- Scope of Application: Defines which virtual asset operators are subject to anti-money laundering obligations and which types of virtual assets fall under the law.
- Registration and Reporting: Crypto-related businesses must register with the FIU and report to relevant authorities.
- Bank Account Verification: Financial companies can provide virtual asset operators with real-name verified deposit and withdrawal accounts, with specified standards, conditions, and procedures.
Virtual asset operators are not only bound by basic anti-money laundering obligations and reporting requirements to the FIU but also have additional duties. These include user classification, transaction detail categorization, and setting acceptance conditions. For instance, operators must obtain an Information Security Management System (ISMS) certification, ensure that executives have no criminal history, and use real-name verified bank accounts.
Failure to comply with these申报 (declaration) requirements can result in severe penalties: up to five years in imprisonment or fines of up to 50 million Korean won. This effectively means the government will directly regulate the cryptocurrency market within the legal framework.
Financial companies transacting with digital asset operators must also fulfill certain obligations. These include verifying the operator’s representatives and transaction purposes, checking whether the operator has submitted the required declarations, and ensuring that customer funds are managed separately.
Based on these principles, digital asset operators that do not meet regulatory requirements will be forced to exit the market.
However, the law includes a grace period: it takes effect one year after passage, and all entities then have an additional six months to comply with the new regulations.
Market Impact: Opportunities and Challenges
The news from the National Assembly was met with swift reaction, particularly from global cryptocurrency exchange Binance.
Shortly after the announcement, Binance tweeted its congratulations on South Korea’s virtual assets entering the regulatory system. The exchange then officially revealed a partnership with Korean fintech company BxB.Inc to jointly issue a Korean Won (KRW)-pegged stablecoin called Binance KRW (BKRW). Each BKRW is designed to maintain a 1:1 value with the KRW.
It is evident that Binance was well-prepared for this regulatory shift and timed its new offering to coincide with the policy change. As cryptocurrency gains legal status in South Korea, it is expected that more global crypto businesses will seek to enter the Korean market.
However, for local Korean crypto enterprises, the new law presents a mixed blessing.
The Double-Edged Sword of Regulation
While the government’s move brings cryptocurrencies into the mainstream financial system, it also means direct state oversight of the market. The Special Financial Act imposes stringent obligations and standards aimed at reducing risks and increasing transparency in crypto asset transactions.
The entry of "regularized" players often leads to the dominance of large incumbents and can create oligopolistic market conditions—the cryptocurrency exchange sector is no exception.
Following the passage of the law, some investors expressed concerns on platforms like The News.Asia. They worry that their preferred exchanges might shut down, begin charging higher fees, or require extensive documentation to continue trading, potentially leading to further losses.
By the end of the six-month grace period, the number of operating crypto exchanges in South Korea may drastically reduce. Industry analysts suggest that only four to six exchanges might survive the new regulatory environment. Currently, only Upbit, Bithumb, Coinone, and Korbit possess real-name bank verification systems. Two others, GoPax and Hanbitco, are operating with ISMS certification.
Long-Term Outlook
In the long run, the legalization of cryptocurrencies in South Korea will likely consolidate the market around a few major players. Well-established exchanges that meet the new standards are poised to grow significantly with regulatory tailwinds. Conversely, many smaller operators who cannot comply may be forced out of business.
For users, this regulatory clarity reduces the risk of being "harvested" by unreliable exchanges. However, it may come at a cost: potentially higher trading fees and increased requirements for personal information disclosure.
Additionally, holders of various altcoins might face challenges. A significant number of smaller tokens could become illiquid or lose all value if the exchanges that list them close down.
Despite these trade-offs, the overall trend is clear. The integration of cryptocurrencies into the formal financial system represents a move towards greater legitimacy, transparency, and broader public acceptance. South Korea’s step forward is another building block in the global effort to bring digital assets into the regulated economy.
Frequently Asked Questions
What is the Special Financial Transactions Act in South Korea?
It is a legislative amendment that brings cryptocurrency exchanges under financial regulation. It requires them to obtain licenses, use real-name bank accounts, and comply with strict anti-money laundering standards.
When does the new law take effect?
The law was passed in March 2020 and is scheduled to be implemented in March 2021. After that, businesses have a six-month grace period to achieve full compliance.
How will this affect cryptocurrency investors in South Korea?
Investors will benefit from greater security and reduced fraud risk on regulated platforms. However, they might face higher fees and could see some smaller tokens delisted if exchanges shut down. For a deeper understanding of how to navigate regulated digital asset environments, 👉 explore comprehensive investment guides.
Which Korean exchanges are expected to comply with the new law?
Major exchanges like Upbit, Bithumb, Coinone, and Korbit are well-positioned to comply. Others, such as GoPax and Hanbitco, are working towards meeting the requirements but the market is expected to consolidate.
What are the penalties for non-compliance?
Virtual asset operators that fail to register and meet the obligations can face severe penalties, including up to five years in prison or fines of up to 50 million Korean won.
Does this mean all cryptocurrencies are now legal in South Korea?
The law legalizes and regulates the operation of virtual asset service providers (exchanges). It provides a framework for their operation but does not automatically make every single cryptocurrency legal; exchanges must still comply with regulations regarding which assets they can list.