Financial authorities in South Korea are planning to implement rigorous eligibility reviews for major shareholders of cryptocurrency exchanges, following the standards set in the banking sector. This move comes in response to the increasing legal issues surrounding shareholders of prominent domestic exchanges like Bithumb and Upbit. The Financial Intelligence Unit (FIU) under the Financial Services Commission has formed a task force to reform the reporting requirements for coin exchanges. The new mandate will be integrated into the coin exchange renewal reporting items and will come into effect in October 2024, serving as a foundation for the operations of existing exchanges in the country.
The Enforcement Decree of the Specific Financial Information Act stipulates that all virtual asset business operators, including exchanges, must file a renewal report every three years after the initial report acceptance. This process will begin again in October 2024, starting with Upbit, which completed its first report acceptance in October 2021. The task force set up by the FIU will primarily focus on scrutinizing the eligibility of major shareholders. This safeguard will enable the government to periodically assess whether the majority shareholder possesses the qualifications required to operate a financial enterprise.
The initiative by the FIU aims to curb illicit activities by major shareholders who hold significant influence over coin exchange businesses and to protect users from potential harm. Previously, major shareholders operated in a regulatory grey area, as current legislation only mandates exchange representatives and registered executives to report and undergo review when declaring a virtual asset business. However, with reports emerging of major shareholders’ involvement in fraudulent and market-manipulative activities, authorities have begun examining their actions more closely.
Two prominent cases have highlighted the need for stricter oversight of major shareholders. Jong-hyun Kang, a major shareholder of Bithumb, is currently embroiled in a primary criminal trial for alleged fraudulent trading. Another case involves Song Chi-hyung, the predominant shareholder of Upbit and Chairman of Dunamu, who is facing a Supreme Court trial for purported market manipulation. These high-profile cases have underscored the importance of ensuring that major shareholders are held accountable for their actions and comply with regulations.
To further address the issue, Representative Yoon Chang-hyeon of the People Power Party has proposed a legislative amendment to the Special Financial Services Act. The amendment seeks to incorporate a review system specifically focused on major shareholders of virtual asset business operators. By implementing such a system, the aim is to strengthen the regulatory framework and increase transparency within the cryptocurrency industry.
South Korean financial authorities recognize the need for enhanced scrutiny of major shareholders in cryptocurrency exchanges. By introducing stringent eligibility reviews, they aim to prevent illicit activities and protect users from potential harm. The upcoming reforms will pave the way for a more robust regulatory framework in the country’s cryptocurrency sector. With proposed legislative amendments, the government is taking steps towards increased transparency and accountability to ensure the integrity and stability of the industry.