An electronic display board at Bithumb’s office in Gangnam, southern Seoul, shows bitcoin’s volatility on March 25, when the travel rule was enforced in Korea. [NEWS1]

The “travel rule” for crypto transactions has been in effect for two weeks, and critics say it could weaken the local market by robbing it of much-needed liquidity.

The Travel Rule is an asset tracking recommendation from the Financial Action Task Force, a global anti-money laundering body. The goal is to help authorities track the movement of virtual assets – such as cryptocurrencies – between crypto exchanges to combat money laundering and terrorist financing. Under the rule, exchanges are required to share information about investors sending and receiving crypto.

Korea incorporated the recommendation into a law that requires exchanges to report any crypto transfer worth 1 million won ($830) or more. Korea is one of the first to adopt the rule.

Although the rule has been implemented in a number of major economies, such as Canada and Switzerland, it has not been adopted in most jurisdictions.

“The cooperation between different countries and international organizations should have been achieved before Korea made the rule effective,” said Park Sung-Jun, CEO of Andus, which operates blockchain platform AndUsChain. He added that more countries would need to enforce the regulations for the travel rule to achieve its goal.

Park said the technical incompleteness of crypto transfers between crypto exchanges is another reason why Korea should have been more patient in implementing the travel rule.

The Korean crypto market was worth more than 300 trillion won at the end of 2021, or about 8% of the total global market, according to a February report from Boston Consulting Group Korea. He predicts that the Korean virtual asset market will reach 1 trillion won by 2026.

Inconvenience

Crypto transfers between exchanges have become difficult following the travel rule.

Domestically, crypto transfers over 1 million won from Upbit, the largest crypto exchange in Korea, to Bithumb, Coinone or Korbit – three other fully licensed exchanges in Korea – are not possible because the systems that they use to manage travel rule requirements are incompatible.

From April 25, the systems will be able to communicate and transfer the required customer data.

Internationally, the situation is more restrictive. Transfers over 1 million won can only be made to overseas crypto accounts owned by the sender.

Domestic exchanges have said they will increase the number of overseas crypto platforms connected to their service.

Before the travel rule, a domestic person could transfer crypto to anyone overseas with a verified account. But according to regulations, domestic crypto investors can only send crypto to their own account abroad, as foreign crypto platforms have not yet adopted travel rules solutions on their services. They are not required to share personal information about their users with national exchanges.

“Liquidity is key for crypto assets because it is a global market, but the travel rule could trap virtual assets inside the internal market until the service is largely tied to platforms. foreign forms,” ​​said a source at a Korean exchange who declined to be identified. . “It could isolate national exchanges from the international market. There is no reason for privacy-conscious foreign platforms to apply the rule immediately.”

Regulation

Under Moon Jae-in’s administration, “the government has been very determined to regulate the crypto market, and the travel rule was a good justification to reinforce that sentiment,” Andus’ Park said. “Even countries with large crypto markets are very cautious about adopting a travel rule.”

India has 100 million crypto users, the United States 27 million and Nigeria 13 million, according to TripleA, a Singapore-based cryptocurrency payment gateway.

The government banned fundraising via crypto in September 2017, the second country after China to do so. Danal’s Paycoin and Kakao’s Klaytn have undertaken initial coin offerings in Singapore.

The government originally planned to impose a 20% tax on crypto earnings of 2.5 million won or more from January this year, although the plan was pushed to start in 2023 until the system is better prepared.

In 2018, former justice minister Park Sang-ki said the government was preparing to ban crypto trading altogether.

“The travel rule was on the list of anti-money laundering regulations included in the special financial transaction law,” designed to prevent money laundering, said Jung Yeon-su, spokesperson for the Financial Services Commission. . “It was enforced with another set of regulations of the law, which was revised last year.”

The obligation to confirm the identity of a person before opening an account is part of the rules included in the law.

“New forms of financing are being created in the 21st century based on blockchain, such as flash loans,” said Kim Hyoung-joong, a multimedia security professor at Korea University School of Cybersecurity.

A flash loan is a form of unsecured loan that has become popular in decentralized finance protocols. It can be used for arbitrage and for collateral swaps.

“Regulating the crypto market without having much knowledge about this industry means Korea will miss an opportunity to lead global finance in the 21st century,” Kim added.

Crypto exchanges are bullish.

“The reasons investors use overseas crypto exchanges are because they want to invest in coins that cannot be traded on domestic exchanges or trade crypto futures or leveraged cryptos” said Kim Byung-chul, a spokesperson for Dunamu, which operates Upbit. “So the key is whether domestic crypto users can transfer coins to Binance, the largest crypto exchange, where crypto derivatives trading is possible.

He added that the impact of the travel rule is limited because most investors in Korea simply buy and sell cryptocurrencies within a single exchange.

The application of the crypto travel rule indicates that cryptocurrency is going mainstream.

Real-name finance was introduced to banks in Korea in 1993, prohibiting individuals from engaging in financial transactions, such as setting up an account, on behalf of others.

“This rule has now been extended to crypto, indicating that the crypto market has been integrated into the traditional financial system,” Kim added.

After years of intense virtual asset regulation, it is hoped that the Korean crypto market will be deregulated under the new administration.

New government

President-elect Yoon Suk-yeol, who will be inaugurated on May 10, has pledged to allow the initial coin offering and pledged not to impose taxes on cryptocurrency trading gains until 50 million won, treating them the same as stock gains.

Yoon will be able to implement some of his cryptocurrency policy through presidential orders, but tax changes require the National Assembly to revise a tax law. The legislator will also require a bill to create a digital asset regulatory agency.

“We cannot be sure how crypto will be handled under the incoming administration.” said Kim of Korea University. “But the difference between the Moon Jae-in administration is that the president didn’t mention anything about virtual assets, while Yoon came up with favorable policies.”

Kim added that the creation of a new government agency that supports virtual assets is essential. The Korea Financial Intelligence Unit (KoFIU) is part of the Financial Monitoring Service and monitors efforts to stop money laundering and terrorist financing.

“For Korea to dominate the market, both private efforts and politics are important,” said Kim Yun-joo, managing director and partner at Boston Consulting Group. “It’s time to consider industrial development rather than regulation. Over the next five years, there will be intense competition without borders as to who will become the next Google or Amazon of the virtual asset industry.”

BY JIN MIN-JI [[email protected]]