Financial Authorities, Began Investigating Self-Issued Coin (Updated Dec 2022)

[Executive Summary]

• When it was revealed that some small and medium-sized coin market exchanges have listed and traded “self-issued coins,” the financial authorities launched a full investigation. The Financial Intelligence Unit (“FIU”) under the Financial Services Commission (“FSC”) sent a letter of cooperation to all domestic cryptocurrency exchanges recently, to investigate the handling of self-issued coins. An official from the FSC said that handling of self-issued coins by domestic exchanges is restricted under the Enforcement Decree of the Act in Reporting and Using Specified Financial Transaction Information (“the Act”).

When it was revealed that some small and medium-sized coin market exchanges, which were in the “inspection blind spot,” have listed and traded “self-issued coins,” the financial authorities launched a full investigation.

According to industry insiders, the Financial Intelligence Unit (“FIU”) under the Financial Services Commission (“FSC”) sent a letter of cooperation to all domestic cryptocurrency exchanges on the 17th of last month to investigate the handling of self-issued coins. An official from the FSC said that handling of self-issued coins by domestic exchanges is restricted under the Enforcement Decree of the Act in Reporting and Using Specified Financial Transaction Information (“the Act”). According to Article 10 Paragraph 20 of the Act, a virtual asset service provider (“VASP”) cannot broker, arrange, or act on behalf of the sale or exchange of virtual assets issued by the VASP or its specially related person.

The financial authorities started a full investigation of self-issued coins, as FTX, which applied for bankruptcy protection to the US court on the 11th of last month following the Luna crisis, also faced a liquidity crisis while abusing its own coin “FTT.” FTX allowed affiliates to obtain mortgage loans with FTT, a self-issued coin, and when a liquidity crisis occurred in such a transaction, it illegally utilized customer assets.

The FIU recently confirmed that there have been no self-issued coins found from the inspection of the five major domestic KRW market exchanges that have signed contracts with banks to issue real-name accounts. However, it expanded the inspection target to 31 coin market exchanges since questions have been raised regarding “MTT,” which was listed in April 2019 by coin market exchange Flata Exchange (Flata EX), and “FLAT,” which was listed in January 2020, whether they are self-issued coins.

Meanwhile, the financial authorities are also closely monitoring the trend of delayed withdrawals from Gopax’s own deposit service, GoFi. In the aftermath of the FTX incident, as Genesis Trading service, a US cryptocurrency lending company, was suspended, withdrawals of certain GoFi products were also suspended since November 16th. As the possibility of escalating into a so-called “coin run” (mass withdrawal) cannot be ruled out in the worst case, financial authorities are monitoring the deposit and withdrawal of KRW and coins on an hourly basis through Gopax and Jeonbuk Bank. An official from the financial authorities said that there have not been any significant changes in the situation thus far.

The FIU expanded its inspection target to 31 small and medium-sized exchanges, despite recently confirming that no self-issued coins had been discovered during the inspection of the five major domestic KRW market exchanges. The financial authorities are closely observing the market in an effort to strengthen the protection for investors and other market participants. In order to avoid any unnecessary hassle, it is crucial to monitor how and where the authorities will be applying the laws.

Read More: Bank of Korea Acknowledges the Need for IEO for Crypto Assets (Updated Dec 2022)