[Exclusive] FIU and KCSC Neglect 'Blocking Illegal Exchanges'... Urgent Legal System Needed Like 'Preventing Terrorism' [Coin Scam Republic]

Special Report <Coin Fraud Republic - They Were Meticulous>

④-⑵Broadcasting Review Committee, Zero Deliberations on Illegal Exchanges
FIU Also Did Not Submit Additional Evidence
Police End Investigations Due to Difficulty Probing Overseas Exchanges
Integrated Response to Digital Fraud Needed... Platform Self-Regulation Too
Naver to Change Band Policy in August... Kakao Also Implementing

The main stage for virtual asset (coin) scams, 'illegal overseas exchanges,' has been neglected for over two years amid government agencies passing responsibility back and forth. The Financial Intelligence Unit (FIU) of the Financial Services Commission requested a review to block access to these exchanges but then took no further action. The Korea Communications Standards Commission (KCSC) also maintained a 'passive administration,' citing ambiguous illegality and waiting for investigation results. As a result, the number of cases reviewed and resolved stands at 'zero.' Amid this regulatory vacuum, overseas exchanges colluded with domestic scam organizations, causing large-scale damage. Academics point out that to prevent coin scams, which are multi-victim fraud crimes comparable to 'terrorism,' it is urgent to establish legal systems for platform self-regulation and proactive, preemptive responses by government agencies. The platform industry, a major channel, also plans to strengthen crackdowns on 'illegal investment leading chat rooms.'

Financial Services Commission Financial Intelligence Unit (FIU) review resolution data on overseas virtual asset service providers for which information review was requested to the Korea Communications Standards Commission from 2022 to 2023. Data provided by the Office of Lee Hoon-gi, Democratic Party of Korea.

Illegal Exchanges 'Cracked Down' Only in Words... Subcommittee Meeting Held Four Months After Review Request

According to data obtained by Asia Economy on the 18th through the office of Lee Hoon-gi, a member of the National Assembly's Science, Technology, Information and Broadcasting Committee from the Democratic Party of Korea, the Communications Review Subcommittee of the KCSC did not proceed with any additional reviews on a total of 62 pieces of information from 22 virtual asset service providers (VASPs) across 16 overseas exchanges, which the FIU requested for review twice between 2022 and 2023. Instead, it resolved to 'suspend the review' and has not revisited any case as of July 2024.

The FIU's first review request to the KCSC dates back to August 2022. The FIU requested a review of 47 pieces of information from 16 overseas VASPs, but the KCSC, after consulting the Communications Advisory Special Committee in November of that year, held the 81st subcommittee meeting in December and resolved to 'suspend the review.' The main reasons were △ the 'illegal business criteria' presented by the FIU were ambiguous △ the possibility of influence from both domestic and foreign nationals holding overseas accounts △ ongoing police investigations. Under the Act on Reporting and Using Specified Financial Transaction Information (Special Act on Financial Transactions, or Specified Financial Information Act), the illegal exchange regulation requires proof of 'business targeting Koreans.' During this process, exchanges sensed the situation and cleverly changed their business methods, such as terminating Korean language services. The FIU made an additional review request in July 2023 for 15 pieces of information from six overseas VASPs, but the 85th subcommittee meeting in December of that year again decided to 'suspend the review.' The subcommittee stated that "there is no difference from the decision to suspend the review made on December 5 last year." This time, the Communications Advisory Special Committee's consultation was not even conducted.

During this process, the two agencies showed a 'ping-pong' behavior regarding illegality judgments and sanctions. The KCSC asked the FIU to verify the actual status of domestic users using the targeted virtual asset exchanges and also requested information on whether credit card payments were blocked per exchange. The FIU maintained its initial stance that since it had notified investigative authorities, it had to wait for the police's judgment. However, the data requested by the KCSC was reportedly practically impossible to submit. In fact, the Seoul Metropolitan Police Agency and other police forces, which had been requested by the FIU to investigate, later decided to 'suspend pre-indictment investigations' because overseas exchanges refused to cooperate.

A KCSC official said, "At the time, the subcommittee carefully reviewed whether the business activities prohibited by law were present based on the standards and data submitted by the FIU and resolved to suspend the review." He added, "After the two suspension decisions by the committee, the FIU did not provide any changed standards or data regarding proof of business activities compared to the initial request." An FIU official stated, "The Financial Services Commission has no legal authority to supervise unregistered businesses, and since penalties under the Specified Financial Information Act require investigation by law enforcement agencies, we collected information to the best of our ability and have been making efforts to respond to unregistered businesses despite limited means such as being unable to secure transaction details through raids."

SRT trading screen listed on the overseas cryptocurrency exchange 'MEXI'. Photo by SRT and other victims of coin fraud

Amid the regulatory vacuum, coin scams colluding with overseas exchanges have become more rampant. For example, MEXC, one of the 16 exchanges for which the FIU requested a review in 2022, currently lists SRT, one of the problematic scam coins in 2024. In the past, MEXC operated Korean language services, Korean marketers and promoters, and online events for a year without registering the exchange, thus falling under surveillance. The balloon effect, where demand for listings shifted to overseas exchanges due to strengthened domestic exchange regulations, was also reflected. The CEO of a coin wallet specialist company, A, said, "I understand that places like 'Elbank' list coins for less than 50 million KRW. They tell clients upfront that as long as it's on the blockchain, they will list it and then take no responsibility afterward." Kim Joo-hyun (a pseudonym), one of the victims of coin scams by the L Investment Group including SRT and RNDX, said, "MEXC does not accept KRW payments and only accepts dollars, so it continues to operate by circumventing the law. The government's policy is somewhat disappointing."

Ongoing Illegal Operations... Need for Proactive Administration

The industry responds that more direct administrative measures are necessary to prevent coin scams. The Korea Blockchain Business Cooperative urged relevant authorities on the 17th to take effective measures, stating that some overseas exchanges are operating illegally in Korea. The cooperative pointed out, "Unlike domestic exchanges, overseas exchanges operating illegally without obtaining Information Security Management System (ISMS) certification and without registering as virtual asset service providers (VASPs) have ineffective measures taken against them." They added, "Their business activities are becoming increasingly bold and sophisticated." They emphasized, "Despite warnings from authorities, some still operate trading platforms in Korean and support their exchange's business and marketing activities through corporate entities in the form of investment companies rather than exchanges."

Academics also suggested that more preemptive government measures are needed due to the significant damage caused by coin scams. Professor Seo Jun-bae of the Department of Public Administration at the Korean National Police University said, "Coin scams are multi-victim fraud crimes that destroy communities and disrupt economic order, so responses equivalent to those for terrorism are necessary." He added, "Currently, coin scams are characterized by non-face-to-face and cross-border features, so scam organizations know they won't go to jail. When law enforcement requests, immediate and integrated responses must be made to deter criminals."

In the past, discussions at the National Assembly level called for integrated responses to such digital-based organized scams, but these efforts were ultimately discarded without passing the 21st National Assembly. Representative Seo Young-kyo of the Democratic Party, who succeeded in entering the 22nd National Assembly, led the 'Special Act on Prevention and Punishment of Digital Multi-Victim Fraud' in 2022. Similar bills include the 'Act on Prevention and Relief of Multi-Fraud Crimes' by former Democratic Party member Park Jae-ho and the 'Basic Act on Fraud Prevention' by former People Power Party member Kim Yong-pan. This is why there are calls for re-discussion in the 22nd National Assembly.

'Investment Scam Channels' on SNS... Naver and Kakao Tighten Crackdowns on Leading Chat Rooms

Search screen for the scam coin 'FVP' keyword on Naver 'Band'. Photo by FVP Coin Scam Victims

There are also calls for strengthened self-regulation on domestic social networking services (SNS) recruiting victims of coin scams. According to the Media Statistics Portal, as of last year, Naver Band (27.7%) and KakaoStory (21.0%) accounted for nearly half (48.7%) of SNS accounts mainly used by Koreans. Platforms like Naver and Kakao have been passive in self-regulation, citing difficulties in defining 'illegal' in investment-related chat rooms, but plan to take more active regulatory measures following the enforcement of the revised Capital Markets Act at the end of this month. The revised Capital Markets Act prohibits two-way investment advice by quasi-investment advisory firms, effectively banning leading itself.

Naver plans to revise the 'Band' activity policy in early August. In this process, it will introduce classifications related to 'quasi-collection' and 'quasi-investment advice' in usage restrictions. It will monitor illegal investment advertisements not from certified investment advisory firms and expel problematic accounts based on a 'one-strike-out' principle. Although it does not specify target asset classes, if quasi-collection is comprehensively judged to be problematic in terms of behavior, it will be included in the regulation. To prevent abuse, specific monitoring criteria will remain confidential. Kakao also announced on the 15th revisions to the 'KakaoTalk' operation policy, including prohibitions on △ operating and promoting stock leading chat rooms △ operating and promoting leading chat rooms for virtual assets and other investment products △ strengthening sanctions against illegal mass spam sending.

Baek Yong-gi, head of the Korean branch of blockchain data analysis company Chainalysis, said, "Fraud response requires a consistent strategy that promotes cooperation across public, private, and civil society sectors." He added, "Effective fraud prevention starts with strong public education efforts, and sustainable solutions require strengthening law enforcement capabilities to address cybercrime globally and block illegal financial networks."

A representative from the office of Lee Hoon-gi, Democratic Party member, said, "Damage caused by illegal operations of unregistered overseas exchanges continues, and once damage occurs, recovery is difficult." He urged, "Active cooperation between financial authorities and the KCSC is necessary to protect domestic investors and users."

We plan to conduct in-depth investigative reporting on 'virtual asset investment scams.' We will strive to establish comprehensive countermeasures to eradicate coin crimes. Please send tips to (lsa@asiae.co.kr). We will investigate thoroughly and report.

▲Team Leader Lee Seon-ae, Manager △Kim Min-young, Cha Min-young, Kim Dae-hyun, Hwang Yoon-joo Reporters