South Korean Banks Head into Dangerous Area as Regulator Investigates Kimchi Premium Bitcoin ‘Irregularities’

• – After the government, media, and regulators increase their scrutiny of the banks’ role in enabling kimchi premium bitcoin investors to profit quickly when trade volumes surge, South Korean banks may find themselves in the firing line.
• – As was previously reported, regulators took action last month to alert banks of their inability to stop businesses from using wire transfers to buy tokens like premium bitcoin (BTC) abroad. Traders then tried to flood local cryptocurrency exchanges for a sizable profit.

Trading volumes from individual investors have skyrocketed along with the growth in BTC values in recent years, which has traditionally resulted in price differences of up to 50% between local platforms like Upbit and international platforms like Binance.

• By purchasing BTC from over-the-counter vendors, some opportunistic traders have attempted to profit from such price discrepancies (particularly individuals based in Mainland China, Hong Kong, and Japan). Authorities in South Korea have compared foreign exchange trading to money laundering and pledged to outlaw it despite the country’s existing tight rules on the practice.
• Since then, banks have responded with overseas remittance restrictions, but there have been worries that – historically – over US$3.4 billion worth of illicit foreign exchange transactions have been carried out in previous years. Additionally, the Financial Supervision Service (FSS) stated last week that it’s possible that all of that money went through regional banks.
• In both Woori and Shinhan, the FSS initially discovered what it believed to be “abnormal” foreign exchange transactions. Prosecutors also examined the evidence.

Energy Kyungjae, citing unnamed sources in the banking sector, claims that the FSS has been aware of potential issues for more than a year and has previously alerted the majority of local banks to potential breaches. In 2021, the regulator reiterated its warnings “many times,” the media source added. The regulator sent explicit warnings to Kookmin Bank, KEB Hana Bank, and Nonghyup Bank in addition to the aforementioned Woori and Shinhan. All five banks allegedly received instructions from the FSS to “be vigilant about arbitrage trading for kimchi premium” in 2021. After an internal audit discovered previous errors (perhaps related to crypto in some cases) extending back to 2018, KEB Hana was penalized this year for breaking the requirements of the Currency Transactions Act.

In the meantime, Chosun stated the FSS was conducting “on-the-spot investigations” and that it was “extending its first inquiry to the entire financial industry.” The prosecution service, the National Intelligence Service (NIS), and the Korean Customs Service all received the results of these investigations.

The latter has previously experienced some success after kimchi premium traders.

However, further investigation into the situation appears to have uncovered a network of shady-appearing businesses that some speculate may have been utilized by international participants to launder money.

The Financial Intelligence Unit (FIU) discovered information regarding “dozens of abnormal transactions” involving an unnamed Daegu-based business and comparable occurrences involving conceivable shell or “paper” businesses situated elsewhere in the nation.

These businesses appear to have conducted cryptocurrency transactions through regional exchanges before changing their funds into fiat KRW and moving them abroad.

Some others asserted that members of the network may have had ties to North Korea.

Yonhap claims that NIS Director Kim Kyu-Hyeon informed the National Assembly Intelligence Committee that the probe into the allegedly unlawful foreign exchange transactions totaling $3.4 billion is “not yet complete.”

The leaders of the country’s top five cryptocurrency exchanges will meet with the Financial Services Commission (FSC) in a historic meeting later this month. Kim Joo-Hyun, chairman of the FSC, will reportedly attend the meeting in person, according to Seoul Kyungjae. Companies are asked to establish a self-regulating organization, and Kim will take ideas from exchanges into consideration. The encounter will be notable because the FSC director has never before met face to face with top business executives. Unidentified industry insiders praised the information, noting that “FSC appears to be more engaged than before in the bitcoin sector and market.”