South Korea steps up crypto regulation with FATF’s Travel Rule

TL;DR Breakdown

• The FATF Travel Rule will go into effect in South Korea today.
• The rule requires crypto companies to collect and share customer information of users sending or receiving crypto.
• The Travel Rule could disrupt South Korea’s DeFi and NFT ecosystem.

The cryptocurrency and Decentralized Finance (DeFi) sector in South Korea might face headwinds in the coming weeks as the long-reported Financial Action Task Force (FATF) Travel Rule becomes effective today. 

South Korea mandates FATF’s Travel Rule

Under the new rule, Korean regulators require all virtual assets service providers (VASPs) to disclose cryptocurrency transactions invoking more than a million Korean won ($820) to promote anti-money laundering (AML) and counter-terrorist financing (CFT) standards in the emerging sector.

Korea previously adopted the FAFT guidelines on March 25, 2021. However, the authorities granted cryptocurrency companies in the country a one-year grace period (which expires today) to adjust to the new requirements. Although the FAFT  Travel Rule would help these companies combat money laundering and terrorist financing, many speculate that the short-term impact could disrupt the Korean DeFi and NFT industries.  

Skilled investors will understand what’s happening with each exchange, but there are a lot more who do not.

says Paik Hoon-jong, COO at asset banking firm Sandbank. 

Exchanges scramble to meet FATF rule

DeFi and cryptocurrency transactions should naturally be anonymous and private. Requiring exchanges to disclose the users involved in transactions is quite odd. Within the one-year period, some Korean exchanges had teamed to develop a solution more suitable and compliant with FATF’s requirements. Upbit’s operator Dunamu developed a system called VerifyVASP, while other Korean exchanges –  Bithumb, Coinone, and Korbit – created another system dubbed CODE.

However, the two systems are yet to establish a common link, which will enable Upbit users to transfer crypto to other exchanges under CODE and vice versa, whilst complying with the new cryptocurrency Travel Rule. Hence, some Korean users are confused about what direction to go, given the proposed link is expected to be established by next month. 

As a result, many think that the Korean crypto sector might be shortly affected by the new regulation in place. However, the long-term effects of the regulation can have a positive impact on the sector.