The Stricter Review of Major Shareholders in South Korean Cryptocurrency Exchanges

South Korea’s financial authorities are set to implement more stringent eligibility reviews for major shareholders in cryptocurrency exchanges. This move is reminiscent of the standards upheld within the banking sector and comes in response to recent legal issues involving shareholders of prominent domestic exchanges like Bithumb and Upbit.

To address these concerns, the Financial Intelligence Unit (FIU) under the Financial Services Commission has established a task force. This task force aims to reform the reporting requirements for coin exchanges and integrate the revised mandate into the coin exchange renewal reporting items by October 2024. The new requirements will serve as the foundation for the future operations of existing exchanges in the country.

The task force’s primary focus will be on scrutinizing major shareholder eligibility. This procedural safeguard will allow the government to periodically assess whether the majority shareholder possesses the necessary qualifications to operate a financial enterprise. By implementing this measure, the FIU aims to crack down on illicit activities facilitated by major shareholders who exert significant influence over coin exchange businesses and to mitigate potential harm to users.

Previously, major shareholders of cryptocurrency exchanges operated in a regulatory grey area. Current legislation, under the Special Financial Services Act, only mandates exchange representatives and registered executives to report and undergo review when declaring a virtual asset business. However, media reports indicate that major shareholders have been involved in fraudulent and market-manipulative activities, which has prompted the examination of their roles and responsibilities.

Notable Cases

Two prominent cases have highlighted the need for stricter reviews of major shareholders. The first involves Jong-hyun Kang, a major shareholder of Bithumb, who is currently embroiled in a primary criminal trial for alleged fraudulent trading. The second case features Song Chi-hyung, the predominant shareholder of Upbit and Chairman of Dunamu, who is facing a Supreme Court trial for purported market manipulation. These instances have drawn attention to the potential risks associated with major shareholders in the cryptocurrency industry.

Representative Yoon Chang-hyeon of the People Power Party has proposed a legislative amendment to the Special Financial Services Act. This proposal seeks to incorporate a review system specifically for major shareholders of virtual asset business operators. If implemented, this amendment would provide a more robust regulatory framework for monitoring major shareholders and preventing fraudulent activities within the cryptocurrency market.

The stricter review of major shareholders in South Korean cryptocurrency exchanges marks a significant step towards enhancing transparency and accountability in the industry. By subjecting major shareholders to eligibility assessments and close scrutiny, the government aims to curb illicit activities and protect users. The proposed legislative amendment further emphasizes the importance of creating a comprehensive regulatory system that addresses the unique challenges and risks associated with the cryptocurrency sector.