South Korea is considering legislation to bring cryptocurrencies into the mainstream and mulling whether to tax crypto assets.
When Bitcoin was created in 2009, the idea of a cryptocurrency was new and a largely unregulated field. As more cryptocurrencies have been developed there has been a growing push to regulate the industry internationally and in key markets such as South Korea.
South Korea first took steps to regulate cryptocurrency in 2017, when rising prices for Bitcoin and Ethereum raised concerns about disruptive financial speculation, along with growing concerns about fraud and illicit activities.
At the time, South Koreans were among the initial cryptocurrency enthusiasts, with one-in-three salaried workers investing in cryptocurrency and local exchanges Bithumb, Coinbit, and Upbit among the top exchanges by volume in the world. As recently as June of this year, the South Korean won was the third most used fiat currency to trade in Bitcoin, accounting for 6.5 percent of transactions.
To clamp down on speculation and improve security, South Korea moved toward requiring real name accounts and introducing a ban on initial coin offerings in 2017 that remains in place.
Despite increasing regulation in recent years, South Korea continues to be an important market for cryptocurrency. Though Bithumb, Coinbit, and Upbit are no longer among the top exchanges by volume and South Korean blockchain startups are increasingly listing their cryptocurrencies abroad, the South Korean won remains the fifth most utilized national currency by cryptocurrency exchanges for Bitcoin and South Korea is among the top 10 countries for total exchanges.
However, in recent years there has been growing scrutiny of cryptocurrency internationally as well as domestically in South Korea.
In June, the Financial Action Task Force (FATF) issued guidelines on virtual assets and virtual asset service providers relating to their obligations to take steps to prevent money laundering and terrorist financing. These include enforcing the travel rule requiring financial institutions to provide customer information when transferring more than $1,000 to another financial institution. The FATF’s guidelines help to create regulatory harmony across different financial jurisdictions and an auditable record for the enforcement of sanctions and investigations after terrorist attacks.
In response, the South Korean National Assembly is taking steps to provide a legal foundation for virtual assets. The legislation will require firms to register with South Korea’s Financial Services Commission’s Financial Intelligence Unit (FIU), which would also have regulatory authority for cryptocurrency exchanges. At the moment, the FIU only indirectly regulates cryptocurrency exchanges through its oversight of South Korean banks. The change would allow bring cryptocurrency exchanges into the financial regulatory framework and allow the FIU to directly develop new regulations for the exchanges.
The legislation would also help bring cryptocurrency exchanges in South Korea in line with the FATF’s requirements to prevent money laundering and terrorist financing by setting ground rules for transactions and requiring firms to adopt greater accountability.
For the moment, South Korea is unable to tax crypto assets such as crypto currency. The Ministry of Finance and Economy (MOFE) has indicated that profits from cryptocurrency trades cannot be taxed under current law. Not all forms of capital gains are taxable in South Korea and there are currently no references to cryptocurrency in the current tax codes. In order for South Korea to tax crypto assets — something government officials have expressed an interest in doing — it will need to develop a definition of crypto assets, determine which type of assets should be taxed, and decide how crypto exchanges should report tax liabilities to the government.
If South Korea moves forward with revising its tax law to cover cryptocurrency, it will not be alone. The United States, the United Kingdom, and Australia all tax cryptocurrency as an asset. There has been some concern expressed about South Korea’s ability to define cryptocurrency, but if tax authorities decide to tax cryptocurrency as an asset it will have other models to look to for how to handle crypto transactions based on capital gains.
While cryptocurrency began as an effort to conduct financial transactions outside of the traditional financial system, if it is to grow to be more than a speculative asset there will need to be regulation to protect consumers, ensure transparency for tax purposes, and to protect against its illicit uses. If South Korea has seen a short-run decline in cryptocurrency transactions as a result of regulation, the focus on establishing a proper regulatory structure should place South Korea in position to benefit from new regulated markets in the long-run.