Two of South Korea's largest crypto exchanges, Bithumb and Coinone, currently have a contract with Nonghyup Bank, which provides banking services for the two exchanges’ fiat on-ramps.
However, Nonghyup recently requested that both exchanges suspend all user deposits and withdrawals of crypto until they (Bithumb and Coinone) establish "sufficient systems for enforcing the travel rule." This would effectively lock in all crypto held by users in the exchanges’ reserves.
The country’s Financial Transactions Reports Act (FTRA), an anti-money laundering (AML) law that was amended in March 2020 to apply to crypto exchanges, requires domestic crypto exchanges to hold partnerships with commercial banks. This is because users are required to register under their real names and link their personal bank accounts in order to access crypto exchange services.
Banks are beholden to financial regulations like the travel rule, a legacy of the Financial Action Task Force (FATF). Whenever funds or assets are transferred from one institution to another, the travel rule requires the sending institution to pass along essential transaction information to the receiving institution. This information includes things like the transmitter's name, account number, address and so on.
Enforcing the travel rule when it comes to crypto trading is tricky, because wallet addresses on blockchain networks do not reveal personal data about the holder.
"The nature of blockchains makes it difficult to track who's sending to whom, which makes it difficult for us to enforce the travel rule," a Nonghyup employee told CoinDesk Korea on Aug. 3.
"We have recommended that Bithumb and Coinone suspend all crypto deposits and withdrawals until they develop sufficient systems that make travel rule compliance possible.”
The employee added that if Bithumb and Coinone do not follow Nonghyup's "request," the bank will withhold its fiat services. In short, users would no longer be able to link their personal bank accounts to the exchanges’ trading platforms.
If this happens, Bithumb and Coinone would not qualify for registration under the Financial Services Commission (FSC). The FTRA requires all exchanges to register with the FSC’s Financial Intelligence Unit (FIU) by Sept. 24. If an exchange fails to register by then, it will most likely be shut down.
Bithumb and Coinone are among South Korea’s “Big 4” exchanges; the other two are Upbit and Korbit. While many industry insiders and observers have speculated that the Big 4 will be the only domestic exchanges to survive the FTRA, Nonghyup’s recent “request” throws a curious wrench into the machine.
The Nonghyup employee clarified that the request did not come from the Korea Federation of Banks (KFB) but was an internal decision. It remains to be seen whether other banks will follow Nonghyup’s lead.
Upbit's contract is with K Bank, while Korbit has a contract with Shinhan Bank.
As of now, the bank contracts of all four exchanges expire on Sept. 24. No bank has confirmed that it will extend a contract beyond the registration deadline.
Bithumb, Coinone and Korbit signed an MOU this past June to co-develop a travel rule system. Upbit declared that it would develop its own system. Details of how far along either party is in this development process have yet to be revealed.
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