"How to Evade Assets to the US and Make Illegal Gifts": Stablecoin Abuse Cases, Bank of Korea's Warning [Financial Microscope]

Warning: Stablecoins Enable Overseas Asset Flight and Illegal Gifting
Need for an Entity to Lead Suspicious Transaction Reporting and Monitoring
Monitoring Must Focus on User-Based On-Chain Activities, Not Just Wallet Addresses
Identity Ver

Person A purchased an ultra-high-end residence in Manhattan, New York, worth 10 million dollars (approximately 14 billion won), with the intention of moving assets overseas. Person A installed a personal wallet application on their mobile phone and created a personal wallet. Afterwards, Person A met an unregistered currency exchange broker in person and received 10 million dollars worth of the stablecoin Tether (USDT) into their personal (non-custodial) wallet, handing over slush funds (Korean won in cash) accumulated over several years. To evade tracking by authorities, Person A transferred the USDT to an exchange in an emerging market with weak Know Your Customer (KYC) procedures, and then withdrew it again to another personal wallet. Person A plans to keep the USDT in a personal wallet and, after immigrating to the United States in the future, launder 2 million dollars worth of USDT into legitimate dollars to use for purchasing a home and covering living expenses.

Person B illegally gifted 5 million won per month to a son who had moved out. Not wanting to pay gift taxes (a cumulative 50 million won over 10 years, with a 10-50% tax rate on the excess), Person B used USDT. To avoid leaving a usage record in Korea, Person B obtained a virtual asset-based prepaid card from the Hong Kong-based fintech company Redotpay under an alias. Fearing that repeated withdrawals from a domestic exchange to a personal wallet would be reported as suspicious transactions to the Financial Intelligence Unit (FIU), Person B mainly used unregistered currency exchange brokers to receive USDT into a personal wallet and then transferred it to the Redotpay prepaid card. Person B’s son received the physical card and used it at domestic Visa merchants, taking care not to repeatedly use it at places like his child’s academy to avoid exposure to the National Tax Service. During overseas trips, the card was used at Visa merchants, and local currency or dollars were withdrawn from coin ATMs for use as study abroad funds for the child.

These are examples of stablecoin misuse featured in the Bank of Korea’s recently published “Korean Won Stablecoin White Paper.” While hypothetical, these cases serve as a warning from the Bank of Korea that, with intent, stablecoins can be used for moving assets overseas and illegal gifting. There are also numerous real-world cases of trade crimes involving stablecoins. According to the Korea Customs Service, the proportion of illegal domestic foreign exchange transactions involving virtual assets surged from 3% in 2020 to 52% last year.

The problem is that it is virtually impossible to monitor and block all illegal money laundering and capital outflows conducted via stablecoins. This is because stablecoins are generally issued and circulated on public, permissionless blockchains. On public, permissionless blockchains, where anyone can participate anonymously and there are no restrictions on activities, traditional centralized regulations are difficult to enforce effectively. Some highlight the transparency of transaction histories, but the core issue is that it is extremely difficult to identify to whom these transaction records belong.Non-custodial personal wallets can be created easily and anonymously by individuals or corporations without any identity verification and without any limit on the number of wallets. Once stablecoins are transferred from a virtual asset exchange to a non-custodial personal wallet with no identity verification, it becomes unclear who is responsible for tracking any subsequent movement of funds.

Tracking the flow of funds becomes even more difficult when blockchain mixers are used, which combine and redistribute virtual assets from multiple users. Even as the ecosystem expands, if public, permissioned blockchains connect to public, permissionless blockchains, the risk of regulatory evasion remains, highlighting many persistent limitations.

Lee Byungmok, Director General of the Financial and Economic Bureau at the Bank of Korea, stated, “There needs to be an entity that reports suspicious transactions and takes the lead in comprehensive monitoring of suspicious activities on public blockchain platforms.” He emphasized, “Tasks such as identifying users involved in suspicious transactions, risk assessment, and blocking transactions cannot be handled solely by the blockchain platform itself. Cooperation among various entities such as issuers, distributors, identity verification companies, and investigative authorities is essential.”

There are also issues to be resolved with identity verification systems on public blockchain platforms. Even regulatory-compliant blockchain platforms with enhanced KYC functions are limited in that they can only confirm that a user’s identity meets certain transaction conditions. This makes it difficult to prevent illegal transactions if a user changes their identity information after receiving a KYC ID but before the expiration date.

The Bank of Korea stressed that, to comply with anti-money laundering regulations equivalent to those for banks, on-chain activities must be monitored by user rather than by wallet address. Based on this, users’ risks should be continuously assessed and managed. For reliability, identity verification companies should be designated as regulated entities by supervisory authorities. Some argue that, despite the associated costs, such measures are essential to prevent abuse, and that after establishing a user-based monitoring system, the efficiency of this market should be re-evaluated.