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Complying with the rules puts South Korea ahead of the curve for regulating virtual assets, but may be harming the domestic industry with overbearing transfer restrictions between exchanges.
South Korean crypto exchanges have reached the government-mandated deadline to come into compliance with the so-called Travel Rule, but not all industry players are pleased with the measure.
Starting today, Korean exchanges will flag any crypto transfers worth more than roughly $821. Transfers higher than that value will be restricted to user-verified wallets and a select number of exchanges that have adopted their anti-money laundering system.
The Travel Rule is a set of guidelines issued by the international financial watchdog Financial Action Task Force (FATF) designed to help authorities track the movement of virtual assets between virtual asset service providers (VASP) such as crypto exchanges or digital asset issuers.
A source from a local centralized exchange today praised the regulatory measure as a step forward for the country’s crypto industry, telling Cointelegraph that:
“The industry is now taking a step towards institutional acceptance and will work harder for mass adoption.”
There may be a problem for South Korea’s traders, who racked up $45.8 billion in crypto market value in 2021, in figuring out which exchanges they can transfer funds to and from. Among the big four exchanges (Upbit, Bithumb, Coinone, and Korbit), there are two Travel Rule systems. Each system functions slightly differently and requires international exchanges to follow its guidelines. If those guidelines are not followed, transfers will not be allowed.
According to the CEO of South Korea-based crypto VC Hashed, Simon Kim, these differences are likely to cause confusion and frustration among domestic traders. He feels that the Korean crypto community sees the mandate as “clearly over-regulation,” as he emphasized to Cointelegraph that:
“In a state where the infrastructure was not prepared, a regulatory body with low understanding was forced to push forward. It is expected that revisions will follow to an appropriate level with criticism from the Korean community.”
The Hashed crypto and Web3 portfolio includes blockchain ecosystems Klaytn and Ethereum, NFT game Axie Infinity, and decentralized exchange dYdX.
Upbit is the largest exchange in the country with over 78.3% of the exchange market share according to local analyst Jun Hyuk Ahn. It has adopted its home-grown Verify VASP program. As of today, Upbit allows transfers to and from its affiliates in Singapore, Indonesia, and Thailand, Bblock, Gopax, Cashierest, Flat Thai Exchange, Aphrobit, Binance, Bybit, Okcoin, Crypto.com, Coinbase, BITFRONT, Bittrex, Bitbank.cc, Gate.io, Kraken, BitMEX, FTX US, and HARU Invest.
Meanwhile Bithumb, Korbit, and Coinone all have adopted the CODE system. This allows transfers between Coinbase, Kraken, Coincheck, bitFlyer, Bybit, Gemini, Coinlist Pro, Phemex, Bitbank, Line bitmax, Bitfront, FTX, Binance.
Domestic transfers are blocked until April 8.
Related: Bank of England and regulators assess crypto regulation in raft of new reports
The rules may hit decentralized finance (DeFi) traders hardest as they rely on personal wallets to make trades. Among all exchanges, no transfers to or from private wallets will be allowed unless the user verifies the address in-person.
“We ... adding new members so that TRUST can provide comprehensive compliance across the crypto industry,” said the joint announcement.
Many major crypto companies based in the United States have released a solution for the Financial Action Task Force's Travel Rule.
In a Wednesday blog post, crypto services provider Paxos announced the launch of the Travel Rule Universal Solution Technology, or TRUST, with members, including Coinbase, BlockFi, Gemini, Kraken, Robinhood, Circle and Fidelity Digital Asset Services. The endeavor is aimed at ensuring crypto firms are in compliance with the Travel Rule while also proving ownership of recipients’ crypto addresses, meeting security and privacy requirements, and not centrally storing users’ personal data.
The Financial Action Task Force, or FATF, recommended to participating regulators across the global that virtual asset service providers, or VASPs, adopt certain guidelines related to anti-money laundering (AML) and anti-terrorist financing (ATF). The guidelines, which many refer to as the “Travel Rule,” aims to prevent users of crypto firms and exchanges from using digital assets for illicit purposes by recommending they provide details on both the sender and recipient to their counterparts for certain transactions of $1,000 or more.
“We are focused on adding new members, so that TRUST can provide comprehensive compliance across the crypto industry,” said the announcement. “The Travel Rule’s reach is expanding internationally, and so must our solution. We are not just focused on exchanges licensed in the U.S., but are expanding to many other global jurisdictions this year.”
TRUST moves our industry forward.
— Coinbase (@coinbase) February 16, 2022
We're proud to be one of 18 leading U.S. crypto exchanges to participate in TRUST, an industry-led Travel Rule solution.
Learn more herehttps://t.co/O48lrQIJrY
Since its introduction in 2019, the Travel Rule has challenged many crypto firms that may not have had the infrastructure necessary to bring them into compliance with the guidelines. While some companies are tackling the problem on their own or sometimes contracting cybersecurity firms, the TRUST represents a unique collaboration of firms adopting a joint solution to the Travel Rule.
Related: Crypto industry seems willing to adopt FATF travel rule: Survey
Both Binance and Crypto.com have implemented a solution called Traveler from crypto intelligence firm CipherTrace. The company’s chief financial analyst, John Jefferies, said in 2020:
“Travel Rule enforcement is simultaneously the biggest milestone and the biggest setback for crypto. It has and will continue to force a level of maturity that will enable the industry to grow into an institutionally accepted asset class [...] It also presents an existential threat for many exchanges and poses potential privacy issues for users.”
“We want to eliminate the hurdles associated with crypto trading, and streamline the experience for new retail investors,” said Finxflo CEO James Gillingham.
Cryptocurrency exchange platform and card issuer Crypto.com will be providing liquidity in a new partnership with Singapore-based hybrid liquidity aggregator Finxflo.
In an announcement on Tuesday, Crypto.com said it would be joining Finxflo as the firm’s first liquidity provider, reportedly allowing the exchange to increase its transaction volume and mitigate market volatility. In general, liquidity aggregators may allow crypto traders to take advantage of deeper liquidity pools and more advantageous price execution.
“We want to eliminate the hurdles associated with crypto trading, and streamline the experience for new retail investors,” said Finxflo CEO James Gillingham. “As we continue to deepen our liquidity, we can provide the best possible price levels across liquidity pools for the institutional investors to price-sensitive retail traders.”
A crypto platform with adequate or high liquidity and competitive market pricing may attract additional traders returning for more transactions, which in turn provides liquidity to other traders acting as counterparties. Finxflo said it is a hybrid liquidity aggregator, aimed at offering competitive pricing for centralized and decentralized finance projects. This model reportedly increases the speed of transactions and reduces the likelihood of market manipulation.
Onchain Custodian will reportedly be providing crypto custody services for Finxflo in order for the platform to comply with Anti-Money Laundering regulations under the Financial Action Task Force’s Travel Rule. Among other directives, the rule requires crypto exchanges and custodial wallet providers to disclose customer information when facilitating a trade of $1,000 or more.