The leader of South Korea's top financial regulator says it’s the responsibility of banks to determine whether or not crypto exchanges have sufficient anti-money laundering (AML) systems.
Eun Sung-soo, head of the Financial Services Commission (FSC), reaffirmed the FSC’s position that it’s the responsibility of banks who have partnerships with crypto exchanges to make sure that their partners follow the country’s AML laws.
“The first line of defense in preventing money laundering is the banks,” he said.
Eun made such remarks during a National Policy Committee meeting on July 1. During the meeting, Yun Chang-hyun, a lawmaker with the main opposition People Power Party, criticized the FSC for “passing on their responsibility to banks.”
Yun’s attack stems from the FSC’s way of enforcing the Financial Transactions Reports Act (FTRA), AML legislation that was amended in March 2020 to apply to crypto firms. The FTRA requires exchanges to register with the FSC’s Financial Intelligence Unit (FIU) by Sept. 24, 2021.
In its FTRA enforcement decree, however, the FSC stated that it will not accept registrations from exchanges with fiat on-ramps that haven’t acquired partnerships with commercial banks, making banks the de facto regulators that administer the first step of the registration process.
Exchanges need bank partnerships because the FTRA requires all exchanges with fiat on-ramps to have their users to register under their real names and link their personal bank accounts.
(Up until now, users were allowed to register under various usernames and deposit cash into an exchange’s company account to purchase intra-platform credits that could be used to purchase crypto. These company accounts are referred to as “hive accounts” because a single account houses multiple users. The updated FTRA bans exchanges from using hive accounts.)
“The FSC and the FIU are the financial institutions that exchanges have to register with, but the first phase of the registration process is being administered by the banks,” Yun said.
“Financial regulators are basically outsourcing the grunt administrative work to banks, and the banks themselves are struggling with this process,” he added.
The FTRA requires banks to report any suspicious activity from crypto exchanges to the FIU. This puts them in a tricky situation. Let’s say a crypto exchange engages in shady activity that violates AML laws, is linked to a pump-and-dump scheme, or lists a token project that is convicted of fraud. Let’s say the exchange’s bank partner failed to detect such shady activity beforehand and therefore fails to report it to the FIU. The FSC would essentially hold said bank responsible and levy a penalty.
This burden is the reason why banks have been so hesitant to partner with crypto exchanges.
Banks have similar AML responsibilities when it comes to cash transfers
In defense of the FSC, Eun pointed out that banks already have a similar responsibility when it comes to cash transactions and transfers. For instance, banks are required to report all transactions that amount to over 10 million won ($8,830) to the FIU. If a transaction is later linked to money laundering or illegal finance and it turns out that the bank that facilitated the transaction didn’t report it, the bank will be punished.
“It’s up to the banks to judge whether or not they can handle the extra work that comes with partnering with a virtual asset exchange. It’s not the FSC’s responsibility to make that decision for them.” Eun said.
“If they can’t even do that, they shouldn’t be in the banking business.”
Only four exchanges -- Bithumb, Upbit, Korbit and Coinone -- currently have bank partnerships, but their contracts need to be renewed. South Korean banks are currently reviewing their partnerships with banks to determine whether or not they’ll continue their contracts past Sept. 24. If an exchange fails to secure a bank partnership, then it’s not even eligible for FIU registration, which makes the process that much more simpler for the FSC.
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