[Song Seungseop's Financial Light] Cryptocurrency Rose, So Why Do Banks Restrict Transfers?

Commercial Banks Move to Establish Overseas Remittance Limits
'Kimchi Premium' Behind Restrictions
Concerns Over International Sanctions if Used for Money Laundering

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[Asia Economy Reporter Song Seung-seop] The cryptocurrency investment craze is heating up. With massive funds pouring in, some say it has become a kind of ‘blind speculation’ frenzy. However, commercial banks have started to restrict overseas remittances. Why are banks limiting remittances even though cryptocurrency prices have risen?

According to the financial industry on the 25th, recently Woori Bank established a limit on the ‘UnionPay Quick Remittance Direct Overseas Remittance’ service. Using this service, one can send money to China non-face-to-face and in real-time. The recipient must be an individual Chinese person, and the receiving currency is Chinese yuan. Previously, it was possible to remit up to $5,000 daily within an annual limit of $50,000, but now it has been restricted to $10,000 per month.

Other banks are similar. Hana Bank set the monthly limit for the non-face-to-face overseas remittance function in ‘HanaEZ’ at $10,000 per day. Shinhan Bank has informed customers that “foreign currency remittances for the purpose of virtual (cryptocurrency) currency trading are illegal.” KakaoBank, an internet-only bank, posted a notice titled ‘Precautions for Overseas Remittance Use,’ stating, “Recently, overseas remittances suspected to be transactions to evade reporting obligations under the Foreign Exchange Transactions Act or suspicion of money laundering have been detected.”

The background for banks putting the brakes on overseas remittances is the ‘Kimchi Premium.’ The Kimchi Premium refers to the phenomenon where the domestic Bitcoin price is higher than abroad. The cryptocurrency prices announced by Upbit, Korea’s largest cryptocurrency exchange, have often been higher than those traded on Coinbase, the largest exchange in the United States. Recently, the difference has sometimes been around 20%.

The Kimchi Premium allows for ‘arbitrage trading.’ Arbitrage trading is the act of buying a commodity in a cheaper market and selling it in a more expensive market. This way, one earns a profit. For example, if someone buys Bitcoin in the U.S. for 50 million won and sells it in the Korean market for 100 million won, they can easily make a 50 million won profit.

Suspicion of Cryptocurrency Arbitrage Trading Increases... Commercial Banks on High Alert

Arbitrage trading itself is not illegal. However, sending money overseas for cryptocurrency investment is illegal. Accordingly, the Foreign Exchange Transactions Act requires proof of the purpose of remittance if the amount exceeds the small remittance limit (single remittance of $5,000, annual $50,000). While it recognizes purposes such as overseas direct investment, trade transactions, capital transactions, and study funds, cryptocurrency purchases are not included.

The problem is that recently, ‘suspicious transaction cases’ have been continuing in the banking sector. There have been cases where foreigners or non-residents send remittances under multiple names, each under $5,000 per transaction. This is a circumvention of the law clause that does not require proof for remittances under $5,000 per transaction. Banks suspect that these funds may have been used for cryptocurrency arbitrage trading.

The reason banks set limits on China remittance-related services is also because remittances from Korea to China have surged. There are also reports in the industry that many Chinese people have recently visited banks requesting remittances of $50,000.

Such transaction patterns also raise concerns about potential use for money laundering. Due to the ‘anonymity’ of cryptocurrencies, it is difficult to identify the owner until just before cash withdrawal. If involved in money laundering, there is a risk of international sanctions in severe cases. This is why commercial banks are on high alert regarding overseas remittance responses.

The financial authorities are also recognizing the seriousness. Recently, the Financial Supervisory Service reportedly held a non-face-to-face meeting with heads of foreign exchange departments at commercial banks to discuss issues related to virtual asset overseas remittances.