December 4th, 2024

South Korea grapples with how to stymie crypto-fueled drug trade

South Korea is well-known for its strict stance on drug use, often branding itself as a “clean” society with zero tolerance for illegal substances.

However, the use of cryptocurrencies to facilitate online drug purchases presents a rising challenge, as the decentralized and pseudonymous nature of digital assets is complicating efforts to maintain control over the illegal drug trade.

In August, the Seoul Southern District Prosecutors’ Office uncovered a network of university students buying drugs with cryptocurrencies. This case is far from isolated; similar incidents in 2022 involved drug purchases via messaging platforms like Telegram, paid for using cryptocurrencies.

With the rise of non-face-to-face drug transactions and digital currency use, South Korean authorities face mounting pressure to tighten their regulatory framework — without stifling a burgeoning financial sector.

HOW CRYPTOCURRENCIES FACILITATE DRUG PURCHASES

One of the critical factors making cryptocurrencies attractive to drug dealers is their ease of use and relative anonymity.

As seen in the case of the university students, users can make payments through crypto exchanges and transfer funds to drug dealers using messaging apps like Telegram. The drugs are then hidden in drop locations, eliminating the need for direct contact between buyers and sellers.

In 2023, South Korea saw a significant 50% increase in drug-related arrests, with over 27,000 individuals apprehended, according to a white paper on Drug Crime published by the Supreme Prosecutor’s Office’s Narcotics and Organized Crime Department.

Authorities have cited the rise of cryptocurrency transactions and secure messaging apps as major contributing factors. Despite the perception that cryptocurrencies offer complete anonymity, this is not entirely accurate. While blockchain transactions are pseudonymous, they are also publicly recorded and traceable with the right tools and expertise.

This traceability allowed South Korean police to track cryptocurrency transactions in the aforementioned case in August, uncovering the identities of buyers like “User A” who spent over $8,800 (12 million won) on illicit drugs in 2023.

Anndy Lian, an intergovernmental blockchain advisor, told Korea Pro that the inherent transparency of blockchain can deter criminals but that many falsely assume that crypto transactions are entirely anonymous.

TIGHTENING REGULATIONS

South Korea has made significant strides in regulating its cryptocurrency sector, aiming to balance innovation with law enforcement.

In 2024, the Virtual Asset User Protection Act (VAUPA) came into effect, marking a critical step toward enhancing transparency and protecting users from illicit activities. VAUPA primarily targets Virtual Asset Service Providers, imposing strict requirements like real-name verification for account holders, anti-money laundering procedures (AML) and cybersecurity measures.

These efforts are aligned with global recommendations from the Financial Action Task Force (FATF), which emphasizes the importance of AML and Know Your Customer (KYC) rules in regulating digital assets.

South Korea’s measures also include requirements for exchanges to register with the Financial Services Commission (FSC) and partner with domestic banks, further ensuring that cryptocurrency transactions are traceable.

Despite these frameworks, experts like Ohoon Kwon, a managing partner at Cha & Kwon law offices, argue that fully crypto-based transactions remain difficult to track, especially when criminals use advanced money-laundering techniques.

Kwon stresses the importance of increasing South Korea’s capacity to detect and prevent crypto-facilitated crimes, urging the government to invest in more sophisticated tracking technologies.

Moreover, there is an increasing recognition that regulation needs to account for the global nature of cryptocurrencies. South Korea has sought to align its regulatory framework with international norms due to the cross-border nature of digital assets.

This means not only improving local law enforcement’s capabilities but also collaborating with international bodies to ensure that cryptocurrencies are not exploited for illicit purposes.

IMPACT OF STRICTER REGULATIONS

While South Korea is tightening the noose on illicit crypto transactions, concerns are growing that overly stringent regulations could stifle innovation in the burgeoning crypto sector.

South Korea has emerged as a hub for blockchain development, with events like the annual Korea Blockchain Week attracting international attention. Moreover, the South Korean won surpassed the U.S. dollar in cumulative crypto trading volume during the first quarter of 2024.

The enactment of VAUPA has already placed significant pressure on cryptocurrency exchanges, many of which struggle to comply with the rigorous regulatory standards.

By requiring exchanges to partner with banks for real-name verification, smaller players have been driven out of business due to the reluctance of major banks to bear the financial crime risks associated with crypto.

Justin Kim of Ava Labs told Korea Pro that while bad actors have always exploited new technologies, overregulation could hinder growth in what is one of Asia’s leading crypto markets. Similarly, Rich O, a country manager at OneKey, criticized the South Korean government’s disconnect from Web3 companies, warning that overly harsh measures may stifle the industry’s development.

There appears to be a growing consensus among crypto experts that while regulation is necessary to prevent the misuse of digital assets, the government must strike a balance to avoid driving innovation out of the country. South Korea, which ranks among the top crypto trading nations globally, risks losing its competitive edge if regulations become too burdensome.

STRIKING A BALANCE

The South Korean government faces a delicate balancing act. While increased regulation is necessary to curb the illegal use of cryptocurrencies in drug transactions, overly restrictive policies could risk driving crypto innovation out of the country. As blockchain technology advances, it is vital that regulators recognize both the opportunities and risks it presents.

The traceability of cryptocurrencies, while often misunderstood, could become a powerful tool in law enforcement’s arsenal.

As demonstrated by the arrest of the university students, authorities can track illicit activities with sufficient expertise and resources. However, experts like Anndy Lian caution that public awareness of this traceability could naturally deter criminals from using digital currencies for illegal activities.

Ultimately, South Korea’s regulatory response will need to evolve in tandem with technological developments in the crypto space, and more stringent regulations alone may not solve the issue.

Instead, a nuanced approach that fosters innovation while enhancing law enforcement’s ability to track and prevent crime will be key to maintaining South Korea’s leadership in the cryptocurrency sector while addressing the challenges of the digital age.

Source: https://koreapro.org/2024/11/south-korea-grapples-with-how-to-stymie-crypto-fueled-drug-trade/

Anndy Lian

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com

j j j

July 18th, 2024

Investors Beware, South Korea is Tightening Crypto Regulations

In a landmark move to safeguard its burgeoning cryptocurrency market, South Korea has rolled out stringent new regulations, including round-the-clock real-time monitoring of digital asset transactions. Spearheaded by the Financial Supervisory Service (FSS), this initiative aims to ensure that virtual asset exchanges can smoothly fulfill their legal obligations. The FSS has teamed up with exchanges to draft the ‘Abnormal Transaction Monitoring Guidelines’ and support the establishment and operation of a regular surveillance system for abnormal transactions.

Simultaneously, a consortium of 20 South Korean cryptocurrency exchanges under the Digital Asset Exchange Alliance (DAXA) has embarked on a six-month review of 1,333 digital assets to address concerns about potential mass delistings under these new regulations. This review process is mandated by South Korea’s new investor protection laws, set to take effect on July 19.

The primary motivation behind these regulations is to protect investors and maintain market stability. While the cryptocurrency market offers significant opportunities, it is also fraught with risks, including fraud, market manipulation, and substantial financial losses. By implementing real-time monitoring and stringent review processes, South Korea aims to mitigate these risks and create a safer environment for investors.

The FSS’s guidelines for abnormal transaction monitoring are designed to detect and prevent suspicious activities, such as money laundering and fraud. This proactive approach is crucial in a market where transaction anonymity and decentralization can often obscure illicit activities. By working closely with exchanges, the FSS ensures that these entities have the necessary tools and protocols to promptly identify and address abnormal transactions.

These regulations represent both a challenge and an opportunity for cryptocurrency exchanges. The requirement for 24-hour real-time monitoring and the comprehensive review of digital assets necessitate significant investments in technology and compliance infrastructure. Exchanges must develop and implement sophisticated monitoring systems capable of analyzing vast amounts of transaction data in real-time. This can be a daunting task, particularly for smaller exchanges with limited resources.

On the other hand, these regulations offer an opportunity for exchanges to enhance their credibility and attract more investors. By demonstrating a commitment to security and compliance, exchanges can differentiate themselves in a crowded market and build trust with their users. Moreover, the collaboration between the FSS and exchanges in developing the monitoring guidelines suggests a cooperative approach that could facilitate smoother implementation and compliance.

The introduction of these regulations in South Korea is part of a broader global trend towards increased regulation of the cryptocurrency market. Governments and regulatory bodies worldwide are grappling with the challenges posed by digital assets, seeking to balance the need for innovation with the imperative of protecting investors and maintaining financial stability.

In this context, South Korea’s approach is noteworthy for its comprehensiveness and rigor. The combination of real-time monitoring, abnormal transaction guidelines, and a thorough review of digital assets represents a multi-faceted strategy to address the various risks associated with cryptocurrencies. This could serve as a model for other countries looking to regulate their own cryptocurrency markets.

While the intentions behind these regulations are commendable, there are potential downsides that must be considered. One concern is the risk of overregulation, which could stifle innovation and drive cryptocurrency businesses out of South Korea. The cryptocurrency market thrives on innovation, and excessive regulatory burdens could deter new entrants and stifle the development of new technologies and services.

According to Crystal Intelligence, the landscape of cryptocurrency regulation has shifted globally, with a majority of nations establishing guidelines influenced primarily by anti-money laundering (AML) directives. This regulatory evolution has precipitated a notable rise in operational costs for crypto exchanges. Consequently, such financial pressures have compelled various exchanges to either cease their activities or relocate to jurisdictions with more favorable regulatory climates. This trend is evident in the United States.

Moreover, the requirement for real-time monitoring and comprehensive asset reviews could impose significant costs on exchanges, particularly smaller ones. These costs could be passed on to users in the form of higher fees, potentially making cryptocurrency trading less accessible and attractive in South Korea. However, the benefits in terms of reduced fraud and increased market integrity can be substantial.

The success of South Korea’s new regulations will depend on several factors. First, the effectiveness of the real-time monitoring systems and abnormal transaction guidelines will be crucial. These systems must be capable of accurately detecting and addressing suspicious activities without generating excessive false positives, which could overwhelm exchanges and regulators.

Second, the collaboration between the FSS and exchanges will be key. By working together, regulators and exchanges can ensure that the regulations are implemented smoothly and effectively. This collaborative approach could also help to address any issues or challenges that arise during the implementation process.

Finally, the impact of these regulations on the broader cryptocurrency market will be important to monitor. If the regulations succeed in reducing fraud and increasing market integrity without stifling innovation, they could serve as a model for other countries. However, if the regulations prove to be overly burdensome and drive businesses out of South Korea, this could have negative implications for the country’s position as a hub for cryptocurrency innovation.

South Korea’s regulations are a bold experiment, one with the potential to reshape the global cryptocurrency landscape. If successful, it could usher in a new era of responsible crypto adoption, with robust safeguards for investors and a framework for sustainable growth. However, a misstep could lead to unintended consequences, stifling innovation and fragmenting the market.

The world is watching with bated breath. Will South Korea strike the delicate balance between stability and progress? The answer will determine not just the fate of its own cryptocurrency industry, but also the course of global regulation. This is a test case with far-reaching implications, and its outcome could set the stage for a future where cryptocurrencies become a mainstream financial tool or remain a niche asset class.

The key lies in international cooperation. If regulatory bodies around the world can learn from South Korea’s experience, fostering collaboration between regulators and industry leaders, a global framework for responsible crypto adoption can emerge. This framework would need to be adaptable enough to accommodate innovation while ensuring the safety and security of investors. Only through such collective effort can the potential of cryptocurrencies be fully realized, fostering financial inclusion and a more dynamic global economy. The future of cryptocurrency hinges not just on the success of South Korea’s regulations, but on a global commitment to responsible innovation.

Source: https://intpolicydigest.org/investors-beware-south-korea-is-tightening-crypto-regulations/

Anndy Lian

www.anndy.com

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March 2nd, 2024

Anndy Lian: South Korea’s New Crypto Rules Bring Market Stability

South Korea is a significant player in cryptocurrency and blockchain adoption — and has a regulatory framework that recognizes this.

One development on this journey is the Virtual Asset User Protection Act, representing South Korea’s first formal attempt to establish legal guidelines for the management and oversight of virtual assets, including cryptocurrencies.

In essence, the Virtual Asset User Protection Act defines virtual assets as digital representations of value that can be electronically traded or transferred and grants authority to the Financial Services Commission (FSC), the primary financial regulator in South Korea, to supervise and regulate the crypto sector effectively.

The regulations, scheduled to take effect on July 19, 2024, are designed to protect user assets and interests, prevent misuse and abuse, enhance transparency and accountability, and promote innovation and development, and we took a closer look during the proposal stage.

We sit down with intergovernmental blockchain expert Anndy Lian for a nuanced take on the new regulations.

Key Takeaways

The Virtual Asset User Protection Act marks South Korea’s first formal attempt to establish legal guidelines for managing and overseeing virtual assets, including cryptocurrencies.
The regulations take effect on July 19, 2024, aimed at protecting user assets and interests, enhancing transparency and accountability, and promoting innovation and development.
They are expected to have significant implications for both South Korea’s virtual asset market and those abroad — but may pose challenges for teams complying with the strict regulatory standards.
There is room for future developments, such as smart contract-based services like DeFi, Decentralized Autonomous Organizations (DAOs), and Web3.

Impact of South Korea’s Crypto Regulations

Q: How is the Virtual Asset User Protection Act applied internationally, and what impact could it have on virtual asset service providers outside of Korea?

A: The Act is going to have a significant impact on the virtual asset industry, both in South Korea and abroad.

The primary function of the Act is to protect the South Korean market and its users. I think it fits the purpose.

On one hand, it may enhance the credibility and legitimacy of the virtual asset market, as well as the protection and security of users.

On the other hand, it may also pose challenges and costs for VASPs [virtual asset service providers] to meet the strict regulatory standards and requirements — some VASPs may decide to exit the South Korean market or restrict their services to South Korean users, while others may seek to adapt and innovate to comply with the law.

If you look deeper into the Act, I think it is fair for everyone — this is very similar to traditional finance.

Q: Regarding financial investment services and the Capital Markets Act (FSCMA), could you explain the changes brought about by the Token Security Guidelines? What are the potential implications of these changes on the virtual asset market?

A: The implications of these guidelines are significant for the virtual asset market, as they will enable the issuance and circulation of security tokens within the legal boundaries of the capital market regulations.

This will facilitate the creation and trading of new and diverse rights, such as fractional shares, in the form of security tokens. It will also foster the development of small-scale OTC markets where atypical types of securities can be exchanged.

Moreover, the guidelines will ensure the protection of investors and the maintenance of market order, as security tokens will be subject to the same rules and regulations as traditional securities, such as mandatory disclosure, authorization, and prohibition of unfair trading activities.

I think this is a positive and progressive move by the South Korean authorities, as it will promote innovation and inclusion in the virtual asset market while safeguarding the participants’ interests. I hope other countries will follow suit and adopt similar regulatory frameworks for security tokens.

Strengths and Challenges of South Korea’s Rules

Q: How does the Digital Asset Framework Bill specifically regulate virtual/digital assets, and what are its advantages and challenges?

A: The advantages of this bill are manifold.

First, it will create a more transparent and predictable legal environment for the development and innovation of virtual/digital assets, which will attract more investment and participation from domestic and foreign entities.

Second, it will enhance the credibility and legitimacy of the virtual/digital asset market, which will increase the public trust and acceptance of these new forms of value and exchange.

Third, it will foster the integration and interoperability of virtual/digital assets with the existing financial system, which will enable more efficient and convenient transactions and services for users and businesses.

Fourth, it will contribute to the global leadership and cooperation of South Korea in the virtual/digital asset space, as it will align with the international standards and best practices set by organizations such as the Financial Action Task Force (FATF) and the G2014.

Q: And the challenges…?

A: First, it will require a careful and balanced approach to ensure that the regulation does not stifle the innovation and diversity of the virtual/digital asset market, which is constantly evolving and expanding.

Second, it will demand a high level of coordination and collaboration among various stakeholders, such as regulators, legislators, industry players, experts, and users, to ensure that the bill reflects the needs and interests of all parties involved.

Third, it will entail a continuous monitoring and evaluation of the impact and effectiveness of the regulation, as well as a timely and flexible adjustment of the rules and standards to cope with the rapid changes and challenges in the virtual/digital asset market.

I think this is a very important and timely initiative by the South Korean government, as it will provide a solid foundation and direction for the future of the virtual/digital asset market, which has a huge potential and value for society and the economy.

South Korea’s Digital Future

Q: How will the Virtual Asset User Protection Act contribute to market stability and investor protection? In your view, could it enhance the stability and transparency of the virtual asset market?

A: The Act will also establish a set of rules that virtual asset service providers (VASPs) are required to follow to ensure the protection of users’ assets, such as separating customers’ funds and virtual assets from their own, storing a certain proportion of virtual assets in cold wallets, having insurance or reserves for liability, and maintaining transaction records.

Moreover, the Act will confer the market oversight and sanctions authority to the Financial Services Commission (FSC), which will be able to punish unfair trading activities using virtual assets, such as insider trading, market manipulation, and fraud, with criminal penalties and fines.

I think it brings market stability and provides investor protection in several ways.

First, it will create a more transparent and predictable legal environment for the development and innovation of virtual assets, which will reduce uncertainty and risk for investors and users.

Second, it will enhance the credibility and legitimacy of the virtual asset market, which will increase public trust and confidence in these new forms of value and exchange.

Third, it will foster the integration and interoperability of virtual assets with the existing financial system, which will enable more efficient and convenient transactions and services for users and businesses.

Fourth, it will ensure the protection of users’ rights and interests, as well as the maintenance of market order, by imposing strict standards and obligations on VASPs and enforcing sanctions on violators.

Q: The Financial Services Commission excluded deposit tokens linked to NFTs, electronic bonds, mobile gift certificates, and CBDCs from the law. What do you think are the reasons behind this decision? In your view, does this effectively prevent virtual asset-related crimes?

A: In my view, excluding these types of tokens from the law does not necessarily prevent virtual asset-related crimes but rather clarifies the scope and applicability of the law to the relevant types of tokens that could pose potential risks or challenges to the financial system or the users.

The exclusion is very obvious as it overlaps with existing laws.

For a few examples, electronic bonds are tokens that represent the debt obligations of an issuer, such as a government or a corporation, to pay a fixed amount of interest and principal to the holders of the bonds.

These tokens are not considered virtual assets under the law because they are already regulated as securities under the existing capital market regulations and do not pose any additional risks or challenges to the financial system.

CBDC is a digital form of fiat currency issued by a central bank, which can be used as a legal tender for payments and settlements. CBDC is not considered as a virtual asset under the law, because it is a direct liability of the central bank, and does not involve any intermediaries or third parties that could pose any operational or security risks.

What Needs to Happen Next?

Q: There’s an opinion suggesting that while the Virtual Asset User Protection Act focuses mainly on asset segregation and unfair trading activities of virtual asset service providers, regulations on smart contract-based services such as DeFi, Decentralized Autonomous Organizations, and Web3 are inadequate.

How do you perceive this? What alternative methods do you see for the upcoming laws to provide more comprehensive regulations aimed at preventing user harm?

A: Personally, I think the current regulations are sufficient for the time being. We must understand that we are dealing with innovation, which changes very fast.

Putting up a base and having backup correction plans along the journey would be a more protective method for the South Korean market.

I think the best way to approach this issue is to adopt a balanced and flexible perspective that considers both the benefits and drawbacks of smart contract-based services and seeks to find a middle ground between regulation and innovation. Some possible alternative methods for the upcoming laws to provide more comprehensive regulations are:

Establishing clear and consistent standards and definitions for different types of smart contract-based services, such as decentralized finance (DeFi), DAOs, and Web3, and applying appropriate rules and requirements for each category.
Creating a sandbox or pilot program that allows for testing and experimenting with new and innovative smart contract services under certain conditions and exemptions and with regular monitoring and evaluation.
Encouraging collaboration and communication between regulators, developers, users, and other stakeholders to foster mutual understanding, trust, and feedback and to promote best practices and self-regulation.
Adopting a principles-based and risk-based approach that focuses on the outcomes and impacts of smart contract-based services rather than the specific processes and mechanisms and that applies proportional and tailored measures according to the level and nature of risk involved.

Source: https://www.techopedia.com/anndy-lian-south-koreas-new-crypto-rules-bring-market-stability