Digital currency exchange Upbit is under investigation by South Korea’s Financial Services Commission (FSC) for allegedly violating the country’s Know Your Customer (KYC) regulations, while Hong Kong issued a stern reminder for digital asset service providers on the need to comply with its licensing regime to avoid misleading the public, as both countries heightened their measures following a string of collapses.
Financial authorities are probing Upbit for allegedly onboarding new customers without proper background checks, according to information gathered by local daily Maeil Business Newspaper. The Financial Intelligence Unit (KoFIU), which operates under the division of FSC, serves as the primary agency conducting the investigation.
Sources with knowledge of the matter claim that the FSC and its lead investigating arm have identified over 500,000 cases of KYC breaches by the digital currency exchange. Others note that the cases are closer to 600,000, with the report predicting the exchange could be slammed with a hefty fine.
The breaches came to light during a virtual asset service provider (VASP) license renewal, prompting market observers to theorize whether the FSC will renew Upbit’s business license. Local regulations require exchanges to apply for license renewal every three years but concerns over KYC impropriety have dragged Upbit’s application for nearly five months.
On closer investigation, the FSC identified a string of cases in which Upbit gave the green light to several customers despite blurred IDs. The IDs submitted to the platform did not contain customers’ names and registration numbers, which are key data required for onboarding new clients on digital exchanges.
With fines pegged at KRW 100 million ($71,500) per case by virtue of the Special Financial Transaction Information Act, Upbit faces a stiff penalty from South Korean financial regulators.
After a jarring period stemming from Terraform Labs’ collapse, South Korea tightened the strings for the local ecosystem, prioritizing robust KYC regulations for service providers. Under the new rule book, users can only trade digital assets on regulated platforms if they provide real-name bank accounts.
For South Korea, the primary motivation of the regulatory agencies is to stifle the use of digital assets for money laundering and terrorist financing applications.
A wave of regulatory concerns
Despite being one of the largest exchanges in South Korea by market volume, Upbit has had its fair share of regulatory troubles. The exchange came under crosshairs for alleged breaches of anti-monopoly rules from the National Assembly, a lingering issue from 2022 as an audit seeks to put the matter to rest.
The monopoly investigation has affected its relationship with K-Bank, with the latter ditching its ambition for an initial public offering (IPO) in Seoul that would have been the largest listing in over two years.
Hong Kong nudges VASPs on licensing rules
The Hong Kong Monetary Association (HKMA) has issued a public advisory against VASPs using the word “bank” in their offerings to mislead users. In its official statement, the banking regulator noted that only licensed financial institutions are allowed to use the word “bank” in the descriptions of their services, adding that digital asset firms using the word are violating the Banking Ordinance.
The central bank issued the warning after two foreign digital asset firms misrepresented their services to the public by claiming to offer banking services. The first firm claimed to be a bank, and the HKMA clarified that it had yet to meet the basic conditions required to be conferred a license. Meanwhile, the second firm did not present itself as a bank but described its card product as a “bank card,” giving the illusion of approval by the HKMA.
In a stern warning, the HKMA noted that VASPs licensed abroad will require approvals from local financial regulators before parading themselves as banking institutions in Hong Kong. The HKMA extended the warning to product and service descriptions involving the bank-affiliated terms.
“The HKMA wishes to remind members of the public that crypto firms which are not authorized institutions in Hong Kong are not supervised by the HKMA,” read the press release. “Overseas crypto firms with names carrying the word “bank” or overseas crypto banks claiming to be licensed elsewhere are not necessarily licensed banks in Hong Kong.”
Under Section 97 of the Banking Ordinance, the HKMA criminalizes firms parading themselves as banks without its written consent.
To prevent members of the public from falling victim, the HKMA’s public advisory contained a link to the list of approved financial institutions allowed to operate as banks in the country. The presence of a Public Enquiry Service hotline provided by the HKMA underscores its resolve to protect investors.
Opening the doors to foreign VASPs
Despite the target of the press release being against foreign-based firms, the HKMA has opened its doors to international service providers. The banking regulator introduced a wave of perks to lure in global firms, including tax concessions and a streamlined licensing procedure for intending companies.
To sweeten the deal, the HKMA urged financial institutions to provide banking services for foreign digital asset firms looking to set up operations in the country. Since signaling its ambitions, several international firms have secured operational licenses in Hong Kong, and several more are angling for a piece of the pie.
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