- Crypto regulation in Korea will crack down unfair crypto practices, but it is unclear how it will affect DeFi industry.
- Established Task Force Team provides opinion to the Financial Service Commission regarding actual regulation implementation.
- DeFi projects worried for the DeFi future in Korea are invited to let their voice heard and influence the regulation implementation.
Since the National Assembly passed “Act on Reporting and Using Specified Financial Transaction Information,” a.k.a. The Financial Transactions Reporting Act (FTRA), there has been a lot of disagreement over whether the regulation applies to all virtual asset businesses: DeFi protocols, wallets, IEOs.
In looking at the amendment we can see that the key thing to consider is whether Virtual Assets Service Providers (VASPs) goals are aimed at “business operation”. The VASP can be considered a running a business if the operations are:
1. Profit generation oriented;
2. The nature of activities is constant and repetitive.
No detailed guidelines are currently available and are currently in the making, but we would like to present what the current Financial Transactions Reporting Act (FTRA) contains for ICO/IEO, Custody Services and Defi projects.
ICO and IEO Projects
ICO and IEO main goal is to raise funds in order to build a sustainable business on which the future profit generation depends. Because ICO and IEO can be seen as a profit-making oriented organizations ICO/IEOs are very likely to be considered as VASP.
Custody service providers
According to Hexlant Research a service that stores the Private Key on behalf of a user, will most likely be considered a VASP, therefore the operator will have to comply with the regulation. In the case of a wallet that does not store the Private Key, but generates revenue (i.e. trading fees) then the operator will likely be considered a VASP as well.
Defi projects
If decentralized finance services such as decentralized exchanges, wallets, prediction markets and lending & borrowing are established and operating in order to generate fees and revenue from users, then it is reasonable to suggest that those services will be treated as VASPs.
However, if a project is built and organized on a smart contract (i.e. decentralized wallet) and does not receive any intermediary fees, then it is unlikely to be treated as a VASP.
In practical terms, services like Argent wallet, dYdX, Compound would be considered VASP, because they have intermediary fees. Metamask, on the other hand, would not be considered a VASP since it does not charge any above mentioned fees.
All of this is still very vague and a lot has to be decided by the Financial Services Commission (FSC) of Korea in the near future and included in the enforcement ordinance act. However it is already clear that there is going to be a lot of controversy if the FTRA requirements apply to DeFi projects.
Strict implementation of the regulation could undermine the values of DeFi.
Requirements for VASPs are strict, costly and would take a long time to comply. The process consists of at least 4 crucial steps:
- Acquire a real-name deposit-and-withdrawal bank account with an approved Korean bank.
- Reporting this real-name account to the Korean Financial Intelligence Unit (KoFIU).
- Implementing new KYC/AML procedures to comply with FATF’s R.16 “travel rule”.
- Acquire Information Security Management System (ISMS) certification from the Korea Internet & Security Agency (KISA). You can learn more about this last requirement that will likely lead to an exodus of Korean exchanges in our previous blog post.
The nature of decentralized finance is in its openness to everyone, everywhere. DeFi is not supposed to discriminate, it has to be censorship resistant and accessible from everywhere in the world. Applying KYC/AML measures significantly undermines these values of DeFi and the De of the Fi disappears. Strict implementation of the regulation is a potential threat to the promised future of decentralized finance.
DeFi community: your voice needs to be heard to achieve the decentralized future of finance.
How the regulation will apply to the exchanges is clear, but it might bring unintended consequences to the DeFi industry in Korea. And Korea is one of the biggest crypto markets in the world.
We have been in the forefront of this regulation to bring transparency and accountability to exchanges. Hanbitco exchange is a founding member of Korea Blockchain Association and Hanbitco CEO is the Chairwoman of the association. Together with other leading crypto businesses in Korea we have formed Task Force team (TFT) to respond quickly to the direction of the regulation implementation by working on a draft proposal to the Financial Services Commission.
We also believe in the decentralized future of DeFi. In order to achieve this future we need your help and opinion on the actual implementation of the regulation.
We seek to create a community of DeFi fans, experts and visionaries who care about the future of DeFi in Korea. Thus we have created a Telegram room for all the questions and discussions, so feel free to connect and make your voice heard.
Join us: t.me/defi_korea
or
contact me directly via email:
Ignas Tauras — Business Development Manager at Hanbitco
ignas@plutusds.com
