Crypto Regulations in South Korea: Key Features
South Korea stands at the forefront of cryptocurrency innovation, boasting the highest trading volume in Asia. The nation’s regulation of digital currencies began in 2017, coinciding with the first significant bull run of BTC and other cryptocurrencies.
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The Journey of Crypto Adoption in South Korea
Regulators realized the futility of trying to defeat or ignore this emerging asset and sought to regulate it.
At that time, numerous exchanges and crypto-related firms emerged in South Korea. However, only a few Korean-rooted platforms like Bithumb, Upbit, Coinone, and Korbit strived to comply with tax laws, paying their dues to the state. In contrast, other digital market players operated in a ‘Wild West' manner, engaging in cutthroat competition, reaping substantial profits, and sometimes resorting to bankruptcy.
Hence, the South Korean government initially adopted a skeptical view of cryptocurrencies. In 2017, it warned citizens about investment risks in digital assets, banned crypto advertising in media, and prohibited banks from serving crypto companies.
By 2020, however, there was a shift in regulatory attitudes. On March 5, 2020, Korea amended the Act on Reporting and Using Specified Financial Transaction Information, effective from March 2021. This amendment broadened the rule's application to virtual asset operators and officially permitted individual investment in cryptocurrencies with an obligation to pay capital gains tax.
In 2021, the government introduced new regulations for crypto exchanges and mining firms, affirming their status as legitimate financial market participants.
Crypto Regulations in South Korea
In South Korea, the Financial Services Commission (FSC) oversees cryptocurrency regulation. This body defines which financial assets are legitimate and establishes guidelines for crypto-related companies.
According to FSC policies, cryptocurrencies are categorized as “virtual assets.” While not recognized as legal tender, they are permitted for use in transactions.
Crypto companies operating in South Korea must secure a license from the FSC. To comply, they are required to follow stringent KYC/AML protocols, which include comprehensive client verification and reporting of any suspicious financial activities, following a risk assessment approach.
Moreover, there are additional stipulations:
- Legal entities must have a registered, certified bank account for the company and provide customers with a business account in their real names at the same bank.
- Business operators are obligated to acquire an Information Security Management System (ISMS) certification from the Korean Internet & Security Agency (KISA).
- Companies need to disclose specific information (such as the company name, CEO details, legal and physical addresses, and bank account details) to the South Korean Financial Intelligence Unit.
Failure to secure ISMS certification can result in severe penalties for company owners. This includes imprisonment for up to five years or a fine of up to 50 million won (around $39,000) if the court considers the infringements to be non-critical.
Crypto Taxes in South Korea
In South Korea, both cryptocurrency companies and individual traders are subject to several forms of taxation:
- Income Tax: Gains from cryptocurrency transactions are subject to a standard tax rate of 22%.
- Value-Added Tax (VAT): An additional 10% is applied to services related to virtual currencies, which includes fees charged by crypto exchanges and mining services.
- Wealth Tax: This tax is applied to large holdings, including crypto assets, with rates ranging from 2% to 50%.
In 2024, the South Korean government is set to introduce a tax on profits from selling NFTs. The trade of non-fungible tokens will be taxed under the existing rules applicable to virtual assets.
Furthermore, all government officials will be mandated to publicly declare their cryptocurrency holdings. Crypto exchanges will also be required to pay interest on funds held in cold wallets for their clients. Additionally, Korean regulators are pushing for a minimum of 5% of digital assets in hot wallets to be insured, the cost of which should be covered by the trading platforms themselves. This new protocol for protecting client rights is expected to take effect in July 2024. While it doesn't specify the rates of interest on cryptocurrency deposits, it is expected that these rates will not be lower than the market average APY for staking similar assets.
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