South Korea Crypto FX Rules Spark Debate as Reach May Extend to ‘Substantially Similar’ Trades

Stablecoins and DEX trades could also fall under the rules

Debate grows over what qualifies as “unjust gains”

Distinction between crypto transfers and payments emerges as key issue

Final regulatory burden will hinge on a presidential decree

Cross-border remittances using virtual assets will now come directly under South Korea’s Foreign Exchange Transactions Act. The National Assembly on May 7 passed an amendment requiring virtual-asset transfer businesses to register. Operating without registration will be punishable by up to three years in prison, and the revision establishes criminal penalties for unauthorized currency swaps and arbitrage trading. Lawyers say the real scope of the regime will depend on a presidential enforcement decree that has yet to be finalized.

Law firms including Bae, Kim & Lee, Yulchon and Jipyong have highlighted three common concerns in newsletters issued after the bill’s passage on May 7, according to the legal industry on May 18. The law’s reach could be far broader than expected. The practical scope of the criminal provisions remains unclear. And many of the key standards have been left to a presidential decree.

Until now, cross-border fund transfers using virtual assets such as Bitcoin and Ether had fallen under anti-money-laundering rules in the Act on Reporting and Use of Certain Financial Transaction Information. But they remained outside the foreign-exchange regulatory framework, drawing criticism that they occupied a regulatory blind spot. The amendment is the first legislative step to close that gap. It will take effect six months after promulgation, meaning it could come into force as early as November.

The amendment defines a “virtual-asset transfer business” in two categories. First, it covers acts by virtual-asset service providers that move virtual assets between South Korea and foreign countries through the sale, purchase or exchange of those assets. Second, it covers cases set by presidential decree that produce a “substantially similar effect.”

Lawyers say the second category could have broad practical consequences. Even if a transaction is structured as a domestic trade in form, it could still be regulated if its economic effect matches that of a cross-border transfer. Transactions involving stablecoins or structures routed through decentralized exchanges, or DEXs, could also be included.

Shim Hee-jung, a lawyer at Jipyong, said many virtual-asset transactions are cross-border by nature. Business models that could be deemed to operate a virtual-asset transfer business may prove more numerous than expected, especially when stablecoins are used in transactions.

Three registration requirements, including connection to the BOK network

To register as a virtual-asset transfer business, firms must meet three requirements simultaneously. They must complete reporting as a virtual-asset service provider under the anti-money-laundering law. They must connect their systems to the Bank of Korea, which intermediates, consolidates and exchanges foreign-exchange transaction data. And they must secure the facilities and professional personnel required by presidential decree. In practice, reporting under the existing AML regime alone will no longer be enough. A separate registration with the foreign-exchange authorities will also be required.

The finance minister will have the power to require registered firms to submit data and information and to conduct business inspections. That authority may be delegated to the Financial Services Commission. Data related to virtual-asset transfers will also be shared with the FSC, the National Tax Service, the Korea Customs Service and the Financial Supervisory Service.

Shin Dong-chan, a lawyer at Yulchon, said virtual-asset service providers already conducting, or planning to conduct, overseas crypto-transfer business should prepare compliance plans in advance to meet the registration requirements.

New criminal penalties for unauthorized currency swaps and kimchi premium arbitrage raise questions

Another closely watched part of the amendment is the tougher punishment for violations of payment procedures. If funds are moved in breach of procedures for currency exchange, remittance or the export of property for the purpose of obtaining unjust gains, the penalty will increase from an administrative fine of up to 50 million won to as much as one year in prison or a fine of up to 100 million won.

Lawyers say the provision appears aimed at so-called hwanchigi, or unauthorized currency swaps, as well as indirect remittances designed to profit from price gaps between crypto exchanges, often referred to in Korea as the kimchi premium. But legal disputes are likely over what counts as “unjust gains.”

Yoon Ju-ho, a lawyer at Bae, Kim & Lee, said disputes are likely over the specific criteria. Questions include whether ordinary investment profits or tax-saving motives could be deemed improper, and whether gaining transaction convenience or lowering transaction costs by avoiding reporting requirements could count as a property benefit.

There is also disagreement over whether the criminal provision can be applied to crypto transactions at all. Article 25 of the amendment explicitly lists “virtual-asset transfers” separately from payments and receipts. That has led to the view that a virtual-asset transfer itself may not be subject to the law’s payment-related provisions. On that reading, the criminal penalty for violating payment procedures could apply only to breaches involving payments and receipts, not to the transfer of virtual assets itself.

Kim Si-mok, a lawyer at Yulchon, said the newly created criminal provision — up to one year in prison or a fine of up to 100 million won — could ultimately be found not to apply in practice to unauthorized currency swaps or arbitrage trades conducted with virtual assets. That makes follow-up revisions to the enforcement decree and foreign-exchange regulations especially important, he added.

Confusion over the term “transfer” leaves key issues to presidential decree

The amendment leaves much of the substance, including the detailed scope of virtual-asset transfer business and the specifics of registration requirements, to presidential decree. That means the actual regulatory burden could vary widely depending on the contents of the enforcement rules.

The National Assembly has already urged the government, in a supplementary opinion attached to the bill, to clarify the use of the term “transfer.” The core issue is that the Virtual Asset User Protection Act uses the word in two entirely different senses.

In the broad sense, “transfer” is an umbrella concept covering all virtual-asset transaction activity, including trading, exchange, custody and brokerage. It appears in definitions of the business scope of virtual-asset service providers. In the narrow sense, “transfer” refers only to the technical act of sending coins or tokens from one virtual-asset address to another. In other words, it means an on-chain remittance.

The revised Foreign Exchange Transactions Act makes “virtual-asset transfer business” a regulated activity while relying in part on concepts from the Virtual Asset User Protection Act. It remains unclear, for example, whether the rules will apply only to the simple transmission of coins from a domestic exchange to a foreign wallet address, in the narrow sense, or also to transactions through foreign exchanges that effectively create the same result as an overseas remittance through trading or exchange, in the broad sense. The same ambiguity applies when stablecoins are converted into dollars on a Korean exchange and then moved to an overseas account. That could be interpreted either as a transfer or as a payment.

Yoo Jeong-han, a lawyer at Jipyong, said definitions could be reset through future amendments to the Virtual Asset User Protection Act or revisions to the enforcement decree and foreign-exchange regulations. The outcome could materially change the actual regulatory scope of virtual-asset transfer business under the Foreign Exchange Transactions Act.

Heo Ran, Hankyung.com reporter why@hankyung.com