Cryptocurrency Exchanges That Fail To Comply With New Rules Face Closure

South Korea has been enhancing its grip over the crypto market by introducing new regulations that exchanges have to comply with. The most recent announcement was that crypto exchanges in the country must seek registration from the local regulator by September 24, 2021, or face closure.

The new regulations apply to crypto exchanges and all firms categorized under the Foreign Virtual Asset Service Providers (VASPs). According to the Financial Services Commission, the firms falling under this category who will not meet the deadline will be banned from offering their services in South Korea.

South Korea Tightens the Noose on Crypto

South Korea has been strict about cryptocurrencies and other digital assets, and in a bid to protect investors, it has introduced several regulations. At the beginning of the year, local regulators in the country enforced a new law that slapped VASPs with heavy penalties and fines if they failed to report suspicious transactions.

The legislation was passed on March 25. However, for firms to comply with the new law, they were given a grace period that will end in September. According to the Financial Services Commission (FSC), firms in the VASP category will have until September 24, 2021, to register and comply.

The FSC is working together with the Korean Financial Intelligence Unit (KoFIU), and to ensure compliance, the regulator has sent out a notice to 27 VASPs operating in South Korea, reminding them to take measures and register before the deadline elapses.

In part, the statement by the FSC reads that “The Act requires VASPs to register with the KoFIU as the law equally applies to foreign VASPs that conduct activities outside Korea but have domestic consequences within Korea.”

Therefore, foreign companies that want to expand their operations in South Korea will have to register with KoFIU and meet all the necessary compliance measures.

VASPs that fail to register with the local regulator before the deadline will be banned. The firms will then cease offering their services to residents in South Korea as of September 25, 2021. Firms that will continue operations past the deadline without complying with the new rule will face heavy penalties, and their executives will risk a prison sentence of up to five years or a fine of up to USD 44,000.

Crypto Exchanges Could Sue the Government

Small crypto exchanges in South Korea have announced that they will sue the government because of the new regulations. According to these exchanges, the new laws show the incompetence of the government to take charge of the regulatory environment.

One of the things that will change with the new rule once it is in place is that local banks in South Korea will be banned from extending their services to crypto exchanges that have failed to comply with the set regulations. Banks will only be permitted to transact with exchanges that are prompt in reporting suspicious transactions and those that have complied with the ID verification requirement for users.

According to banks in South Korea, such limitations signified that the government and the relevant regulators had passed on the verification process of crypto exchanges to banks. In this case, banks were being forced to be responsible for creating real-name accounts.

Several commercial banks in South Korea and the Korea Federation of Banks have appealed to the government to relax the strictness to comply with the new rules. According to these institutions, the law exposed them to high liabilities if crypto exchanges engage in financial crimes.

Hence, the Korean government is facing pressure from crypto exchanges and commercial lenders and banks. Hence, small crypto exchanges in the country are filing a constitutional appeal that will put regulators in the spotlight over their failure to take up responsibility and monitor the industry to ensure compliance.

However, not all banks and crypto exchanges are in line with the said lawsuit. Shinhan Bank, K Bank and NH Bank have already started the process of vetting crypto exchanges. In addition, large crypto firms such as Upbit, Bithumb, Korbit and Coinone have already taken steps to compliance. Hence, once the law comes into effect, smaller exchanges that fail to comply will suffer the greatest blow.

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