Crypto Korea: Travel Rule Impact on Exchange Users
AML duties on VASPs go into effect on March 25, 2022
What is a ‘Travel Rule’?
Financial Action Task Force (FATF) introduced guidance for virtual asset service providers (VASPs) to disclose identifying data of sender and recipient for virtual assets (VA) transactions over a certain threshold. The most recent FATF guidelines include travel rules that apply to transfers between exchanges and personal wallets.
Did Korea adopt a Travel Rule?
Korea’s Financial Services Commission (FSC), a Korean financial regulator, has mandated AML duties on VASPs that will go into effect on March 25, 2022. This includes the Travel Rule.
Current Status
There are 4 exchanges with fiat on-ramp in Korea. Those are Upbit, Bithumb, Coinone, and Korbit. And based on Bitcoin transaction volumes, two exchanges—Upbit and Bithumb—have near 97% of the market share.
Upbit
Korea’s top exchange has created a solution and an alliance called VerifyVASP to comply with Travel Rule. The good news is that Upbit has not yet blocked its users from withdrawing to their personal wallets or any exchanges at the moment. However, there have been reports of individual cases where Upbit users had to prove they own the wallet they are withdrawing to by sending a screenshot to the Upbit customer service desk to proceed with withdrawals. With the deadline is approaching, many are waiting to see how Upbit will comply with the Travel Rule.
Bithumb
Korea’s 2nd biggest exchange had made the headlines when it announced Bithumb would block all withdrawals to personal wallets and non-whitelisted exchanges starting January 27th, 2022. As of today, Bithumb only allows withdrawals to 12 exchanges. It recently added FTX, but Binance is still excluded.
Coinone
Coinone announced its users could withdraw to their wallets after whitelisting their wallets through CODE, a Travel Rule solution based on R3 platform by Bithumb, Coinone, and Korbit. During the process, users will need to record a wallet app showing both the wallet address and at least one identifying data (email, phone number, or name) matching the account registered at the exchange. If a wallet such as Metamask does not display identifying data, it cannot be whitelisted.
Korbit
Like Upbit, Korbit has not yet announced how it will comply with Travel Rule. However, as it belongs to a CODE Alliance along with Bithumb and Coinone, it is expected to follow a similar route of Bithumb or Coinone: either completely block the withdrawals to personal wallets or whitelist individual wallets. It will favor Korbit to go with the latter to grow its market share in Korea.
Wallet providers and other VASPs
For wallet providers and other VASPs excluding CEX, they have only few options if they want to include Korean users to their business.
Ask users to withdraw to foreign exchanges and then withdraw to their wallets.
Add a screen to display a personal email address, phone number, or name.
Work with the CEX directly or join the alliances (VerifyVASP or CODE) and go through KYC for each customer's wallet address and provide the info to the exchanges.
What Now?
When March 25th arrives, all withdrawals to personal wallets will be blocked entirely or require whitelisting the address. The current clear winners of the mandated AML duties and Travel Rule are centralized exchanges (CEX), as they effectively prevent users from accessing DeFi and other crypto ecosystems. We will see if this remains true as users whitelist their wallets or stay content with what CEX offers them.