[The Return of Bitcoin] Virtual Currency Regulation Policies Pour Out, but Institutionalization Still Far Away

Financial Authorities Say "Not Institutionalization" Despite Special Act on Reporting and Taxation Announcement for Next Year
US and Japan Already Institutionalized...Urgent Need for Investor Protection Measures

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] Although the government is rolling out various regulatory policies targeting virtual currencies such as Bitcoin, there are criticisms that it is actually turning its back on institutionalization. Countries like the United States and Japan are already taking steps to incorporate virtual currencies into the formal financial system, and there is a growing call for a policy shift to protect investors.

On the 17th, the Financial Services Commission announced a reporting manual for virtual currency operators who will be newly subject to anti-money laundering (AML) obligations ahead of the revised Act on Reporting and Using Specified Financial Transaction Information (the "Special Financial Transactions Act") taking effect on the 25th of next month.

The main point of the Special Financial Transactions Act is to impose AML obligations on domestic exchanges that buy and sell virtual currencies at a level comparable to general financial institutions. Going forward, virtual currency exchanges will not be allowed to receive investors' funds into their corporate accounts without real-name accounts at commercial banks. If a virtual currency exchange uses a specific bank, customers will also be required to conduct financial transactions using accounts at the same bank. Additionally, exchanges must request more personal information than before, such as names and resident registration numbers, to comply with AML regulations.

From next year, profits earned from virtual currency investments will also be subject to taxation. If the capital gains from selling virtual currencies exceed 2.5 million KRW annually, a 20% tax will be imposed.

Despite these moves, the government is drawing a line, stating that it is not institutionalizing virtual currencies. The financial authorities maintain that the Special Financial Transactions Act and the tax announcement for next year do not constitute institutionalization of virtual currencies. They argue that investment responsibility lies entirely with the investor, whether they win or lose money at a casino. A financial authority official stated, "The government currently does not regard virtual currencies as institutional assets, and this stance remains unchanged. Given the recent high volatility of Bitcoin, investment responsibility lies fully with the individual, so investor caution is necessary."

However, as institutionalization of virtual currencies is delayed, criticism is growing that investor protection is also being neglected. The Special Financial Transactions Act and the revised tax law focus on anti-money laundering, but there are no investor protection measures such as liability for damages by exchanges.

Hwang Sewoon, a research fellow at the Korea Capital Market Institute, pointed out, "The current Special Financial Transactions Act is limited to transparency of funds and does not cover financial investment assets. Even if virtual currencies are not recognized as a means of payment, it is necessary to grant them the character of investment assets and establish formal investor protection measures like those for institutional financial companies."

The domestic situation contrasts with the global trend, where virtual currencies are being embraced within the institutional financial system. Recently, Anchorage Digital Bank in the United States received nationwide banking approval from the Office of the Comptroller of the Currency (OCC). In Japan, virtual currencies are being recognized as a means of payment and incorporated into the institutional framework as financial or investment assets.