Secondary Boycott Risk... Commercial Banks Draw a Line on Cryptocurrency Despite Immunity Discussions (Comprehensive)

Possibility of 'Secondary Boycott' on Cryptocurrency Money Laundering in Major Countries Including the US
Basel Committee: "Cryptocurrency Facilitates Money Laundering and Terrorist Financing... Risks for Banks"
Increased Likelihood of Closure for Small and Medium Cryptocurrency Exchanges

[Asia Economy Reporter Kim Jin-ho] Discussions on 'exemption criteria' for incidents such as money laundering to assist banks in issuing real-name accounts for cryptocurrency exchanges have begun, but doubts remain about their effectiveness. Even if domestic financial authorities' sanctions are avoided, the possibility of facing severe penalties from major overseas countries like the United States remains. The most concerning issue is the potential 'secondary boycott' that could arise if money laundering incidents related to countries sanctioned by the U.S., such as North Korea and Iran, occur.

According to the financial sector on the 14th, some commercial banks and the Korea Federation of Banks have participated or are preparing to participate in a dedicated task force (TF) for cryptocurrency exchanges, which includes related agencies from the Financial Services Commission. The banking sector plans to focus discussions with authorities on legal issues related to issuing real-name accounts for cryptocurrency exchanges through the TF. It is known that they have already conveyed to the authorities the need for 'exemption criteria' concerning incidents like money laundering.

However, even if 'exemption criteria' are established, it is uncertain whether they will be effective. This is because major overseas countries, including the U.S., are highly sensitive to money laundering incidents. Even if exemption criteria are prepared through the TF, they will only apply domestically and cannot serve as a means to avoid sanctions from foreign governments or financial authorities.

Many commercial banks that have not partnered for real-name accounts are most concerned about this aspect. They are particularly sensitive to the fact that money laundering incidents related to cryptocurrency could potentially trigger a 'secondary boycott' issue. A 'secondary boycott' refers to the U.S. sanctioning third-country companies or financial institutions that conduct transactions with countries under U.S. sanctions.

Financial institutions violating this face sanctions such as asset freezes within the U.S. and blocked access to the U.S. financial network. Being blocked from accessing the U.S. financial network means they cannot conduct dollar transactions. For banks, this is essentially a death sentence. A commercial bank official said, "It is clear that the disadvantages far outweigh the benefits of partnering with cryptocurrency exchanges," adding, "If any problem arises and dollar transactions become impossible, it would inevitably lead to bankruptcy, which is an enormous risk." Another bank official also said, "Even if exemption criteria are established, banks may not be completely free from responsibility," and "For now, it seems safer not to partner with exchanges for real-name accounts."

In fact, in the past, Industrial Bank of Korea paid a fine of 104.9 billion won to the U.S. Department of Justice and the New York State Department of Financial Services for violating Iran sanctions related to money laundering. Banco Delta Asia in Macau, which was involved in transactions with North Korea, went bankrupt due to the U.S. secondary boycott.

The Basel Committee on Banking Supervision (Basel Committee), which sets global financial supervisory standards and discusses issues among supervisory authorities, recently classified cryptocurrency as the highest-risk asset, further raising doubts about the appropriateness of establishing 'exemption criteria.' The Basel Committee expressed strong concerns about the extreme price volatility of cryptocurrencies and their use in illicit transactions. It pointed out that cryptocurrencies are exploited for money laundering and supporting terrorist organizations, putting banks at risk.

A financial sector official said, "Considering the Basel Committee's stance strongly urging stricter cryptocurrency regulations, it seems difficult to expect financial authorities to actively establish exemption criteria."

Meanwhile, only four exchanges currently operate with Information Security Management System (ISMS) certification and real-name accounts: Upbit, Bithumb, Coinone, and Korbit. Partner banks such as K Bank for Upbit, NongHyup (for Bithumb and Coinone), and Shinhan Bank (for Korbit) are currently reviewing whether to renew contracts with these exchanges. Depending on the renewal decisions, these exchanges may be able to file reports with the Financial Intelligence Unit (FIU).

According to the Special Financial Transactions Information Act (Special Act on Reporting and Using Specified Financial Transaction Information), exchanges that fail to obtain ISMS certification and real-name accounts through bank agreements by September 24 will effectively be forced out. Currently, the number of cryptocurrency exchanges is estimated to be between about 60 and 200. The industry is concerned about the possibility of a wave of closures among small and medium-sized cryptocurrency exchanges.