Main Highlights
- South Korean financial regulators are facing increased scrutiny due to a significant surge in cryptocurrency transfers to Cambodia, highlighting new anti-money laundering (AML) challenges.
- Major South Korean exchanges, Bithumb and Upbit, were involved in facilitating large volumes of suspicious transfers, primarily in USDT stablecoins, to a Cambodian online marketplace sanctioned by the U.S. and UK.
- The phenomenon has ignited political debate, with lawmakers questioning the effectiveness of current countermeasures against offshore financial crime facilitated by crypto.
- South Korea’s crypto market is one of the largest globally, with significant trading volumes that prompted comprehensive digital asset regulations, including a Travel Rule, to enhance oversight and investor protection.
- Despite regulatory efforts, loopholes in cross-border transfer regulations and the digital asset landscape create opportunities for illicit activities, while stringent banking partnerships act as a barrier for smaller domestic exchanges.
- The recent approval for Binance to acquire a stake in GOPAX signals a potential shift, challenging the market duopoly and raising discussions about fair competition and regulatory balance.
South Korea’s Crypto Sector Faces AML Scrutiny Amidst Cambodia Transfers
South Korea’s cryptocurrency sector is under intense observation following an extraordinary 1,400-fold increase in transfers to Cambodia last year. This surge has brought to light fresh anti-money laundering (AML) challenges for the nation’s financial regulators.
The country’s leading crypto exchanges, Bithumb and Upbit, were identified as handling the largest volumes of these potentially suspicious transfers. Bithumb processed approximately 12.4 billion won (around $9 million USD), while Upbit handled 366 million won (approximately $271,000 USD). The funds were predominantly directed to Huione Guarantee, an online marketplace based in Cambodia that has faced sanctions from both the United States and the United Kingdom. The preferred method for these transactions was USDT stablecoins.
💡 Realistically, it’s extremely difficult to detect all suspicious transactions on Korean exchanges before they occur, commented Youchull Jung, an attorney specializing in white-collar crime at Lee & Ko in South Korea. Jung highlighted that the movement of crypto from Korean to Cambodian exchanges exemplifies a continuous enforcement challenge, where reports are filed and transactions are blocked only after the illicit movement of funds has already commenced.
Korea’s Offshore Financial Crime Crisis
Financial scams that channel cryptocurrency to Cambodia have become a significant political issue in South Korea. During a parliamentary audit on October 27, lawmakers raised concerns regarding the speed and efficacy of the regulatory bodies’ responses and implemented countermeasures.
Jung further explained that increased enforcement within South Korea has prompted fraudsters to establish operations from overseas hubs, specifically mentioning Cambodia and the Philippines. In these locations, they reportedly collaborate with local criminal networks to conduct their activities.
South Korea’s Booming Crypto Market
📈 South Korea has established itself as the world’s second-largest market for digital assets, trailing only the United States. The Bank of Korea reported that the country’s five primary cryptocurrency exchanges held a combined total of $73 billion in assets by the end of 2024. Crypto trading volumes in South Korea have notably surpassed those in the stock market.
This rapid growth prompted regulators to introduce a landmark digital asset law in 2024. This legislation aimed to tighten oversight of cryptocurrency exchanges and bolster investor protections. The law expanded upon the existing AML Act of 2021 and incorporated a Travel Rule, mandating that registered exchanges share verified information for cryptocurrency transfers exceeding one million won (approximately $800 USD).
Navigating Regulatory Arbitrage
While South Korean authorities focused on developing a domestic framework for virtual assets, criminal organizations have exploited vulnerabilities in cross-border transfer systems, according to Jongbaek Park, an attorney specializing in digital assets at Bae, Kim, Lee law firm.
The Foreign Exchange Transactions Act, originally enacted in 1999, remains the cornerstone legislation for cross-border payments and remittances in South Korea. However, this act predates the widespread adoption of digital assets and does not explicitly categorize cryptocurrencies as a legitimate means of payment, creating a legal gray area for regulators and users alike.
📍 Korea has very strict foreign exchange regulations. Under the current rules, anyone remitting securities must file a report with the Bank of Korea in advance, Park stated. But it’s not clear whether crypto assets or blockchain tokens fall under that requirement. He added that transferring digital tokens without prior notification to the Bank of Korea could potentially be a violation of the law.
High Entry Barriers for Smaller Exchanges
The implementation of the AML Act significantly reshaped South Korea’s crypto landscape. Prior to its enforcement, approximately 60 cryptocurrency exchanges were operational nationwide. Following the stricter regulations, only five exchanges managed to secure the necessary real-name verified bank accounts required to offer Korean won trading services.
Tae Eon Koo, a fintech attorney at Lin Law Firm, described the AML Act as a dual-edged sword, acting as both a strength and a bottleneck. The real-name trading system is a critical component of South Korea’s crypto AML and Know Your Customer (KYC) regulations, requiring exchanges to establish official partnerships with banks.
⚡ The requirement to secure a real-name verification partnership with a domestic bank is not written in law but enforced for AML reasons, Koo explained. Without this, it makes it nearly impossible for new players seeking to compete with the established ‘Big 5’ exchanges, to enter the market. He noted that current regulations effectively position banks as gatekeepers to the Korean won market.
Attorney Jongbaek Park also commented that regulators adopt a conservative or extremely selective approach when granting exchanges permission to convert cryptocurrency directly into fiat currency. He added, The Financial Services Commission, as its policy, does not want banks to give bank accounts to many crypto exchanges. At the moment each bank is only allowed to give one bank account to one exchange.
Breaking the Crypto Duopoly
Binance has successfully re-entered the South Korean crypto market after receiving regulatory approval to acquire a 67% stake in the local exchange GOPAX. This clearance, granted by the Korea Financial Intelligence Unit (KoFIU) on October 16, marks the first significant entry of a foreign exchange since the introduction of the Travel Rule. Binance had previously exited the South Korean market in 2021 due to its inability to secure a banking partner.
✅ Its re-entry is a big deal, commented Koo. Because it has the potential to break the current duopoly held by Upbit and Bithumb.
Concerns of ‘Reverse Discrimination’
Some domestic cryptocurrency exchanges have voiced concerns about what they perceive as reverse discrimination. They argue that global entities like Binance face fewer entry barriers by acquiring licensed local platforms in South Korea. Meanwhile, these domestic exchanges contend that stringent AML and banking regulations continue to impede their own overseas expansion efforts.
📊 The current market sentiment is that existing regulation is not protecting fair competition, Koo stated. Instead, it may be creating an unbalanced playing field. However, he suggested that Binance’s return could potentially shift this balance.
Koo elaborated, Binance brings massive capital, operational expertise, and, most importantly, deep liquidity. But how much influence it has will depend on whether regulators allow GOPAX to share its order book with Binance’s global platform.
Final Thoughts
As global cryptocurrency exchanges expand their presence and domestic players adapt, the ultimate growth and credibility of South Korea’s digital asset market may depend on its capacity to effectively combat financial crime through digital channels. The evolving regulatory landscape and competitive dynamics will undoubtedly play a crucial role in shaping its future.