Korea Expands Cryptocurrency Exchange Fraud Probe

Bithumb is reportedly one of the main targets of FSC's anti-money laundering investigation

by Marin Marinov
14 May • 5 min
In Regulation

Korea's Financial Services Commission (FSC) has joined an ongoing cryptocurrency exchange probe in the country to help fellow authorities widen its scope, Korean media outlets reported on Monday. The regulator will investigate the exchanges’ corporate accounts in local banks in an attempt to find possible abuses of cryptocurrencies for fraud or money laundering.

One of the main targets of the probe is Bithumb, an unnamed official from FSC told the Korea Times newspaper without revealing further details. Bithumb is among the leading local crypto trading platforms with around USD 6 billion reserves in virtual currencies at the end of 2017, up 220% for a year. The exchange offers inter-cryptocurrency trading of a wide variety of digital coins, including Bitcoin (BTC), Ethereum (ETH) and Ripple (XRM).


The sector investigation

Korea’s Financial Supervisory Service (FSS) and prosecutors have been examining whether the crypto exchange sector complies with anti-money laundering (AML) rules. FSC has joined the probe after a request by FSS. The move comes amid enforcement of new AML rules in the country.

Earlier this year, the regulator banned anonymous virtual currency trading by obliging exchanges to follow a real-name identification process for traders and retail investors to have real-name cryptocurrency bank accounts. FSC has also introduced the so-called “free pass” that enables regulators to check a transaction’s history, without court permission.

On Friday, FSC and the Financial Intelligence Unit (KIU) searched the headquarters of UPbit, the largest Korean crypto exchange by trading volume, causing substantial losses of the main cryptocurrencies. Upbit, which is investigated over fraud allegations, is still operational.

one big sentence on a white background
FSC logo/Source: Korea government.

“The FSC is collaborating with authorities in other countries. Our latest findings show that the domestic exchange faked its balance sheets and deceived investors. The FSC is checking UPbit’s computer system with prosecutors and the FSS to audit the exchange's virtual currency holdings,” another unnamed FSC official said as quoted by the Korea Times.

In March, Korean authorities raided the offices of three cryptocurrency exchanges on fraud and AML investigations, including Coinnest. Seoul Police Department and Prosecutor’s office found that customers’ funds were sent to the personal accounts of executives at Coinnest and therefore arrested its founder Kim Ikhwan.


Easing or tightening the rules?

South Korea is one of the largest crypto trading markets in the world and its authorities are increasingly conscious about regulations in the sphere, trying to protect consumers. In September 2017, FSC banned domestic companies from taking part in Initial Coin Offerings (ICOs), but a group of lawmakers is working on a framework for legalization of ICOs upon “certain conditions”.

Last week, Yoon Suk-heun, the new FSS governor, said he wants to ease rules on local cryptocurrency exchanges, because “there are some positive aspects to cryptocurrencies”.

Under Korean laws, the Financial Services Commission is the super-regulator setting up policies and supervising other financial regulators. FSC oversights FSS investigations, inspections, examinations and law-enforcement activities.

Global regulation?

FSC Vice Chairman Kim Yong-beom has called for global action on crypto-asset regulation:

“We are seeing a steady development of blockchain technology thanks to its greater accessibility and efficiency. Because this technology has the potential to shake up today's regulations on securities, regulators have to respond to such a looming challenge,” Kim Yong-beom has said.

Korea's call comes amid China's ban on crypto trading and Japan's new AML rules for virtual currency trading platforms. The European Union has also adopted anti-money laundering rules for crypto trading platforms.

On a global scale, G20 countries agreed to “monitor” crypto-assets but stopped short of any specific actions after the Buenos Aires Summit of finance ministers and central bank governors. The summit called for global implementation of anti-money laundering and counter-terrorist financing (CTF) standards regarding crypto-related activities.