Banks face probe on bitcoin fraud

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Banks face probe on bitcoin fraud

Korean financial authorities plan to launch a special investigation into local banks that provided accounts to cryptocurrency exchanges as part of government efforts to prevent cryptocurrencies from being used in illegal financial activities and curb speculative investment.

The Financial Intelligence Unit, a body under the Financial Services Commission that monitors illegal financial activities such as money laundering and terrorist financing, will work with the Financial Supervisory Service, Korea’s financial watchdog, to review accounts owned by local bitcoin exchanges and issued by six major commercial banks - KB Kookmin, Shinhan, Woori, NH Nonghyup, the Industrial Bank of Korea and Korea Development Bank.

The inspection, which will run from today to Thursday, will mainly focus on whether banks complied with the obligation to prevent any money laundering activities when they issued so-called virtual accounts. These accounts are anonymous temporary accounts tied to the corporate accounts of cryptocurrency exchanges. They work as mother accounts for virtual accounts used by individual traders. Under a single corporate account could be as many as a few million virtual accounts, according to estimates.

NH Nonghyup issued two corporate accounts, one each to Bithumb and Coinone, Korea’s top exchanges. Although it’s unclear exactly how many virtual accounts are linked to those accounts, the amount of deposits stored at these two accounts stood at approximately 786.5 billion won ($740.9 million) as of Dec. 12, according to data presented by Rep. Park Yong-jin of the ruling Democratic Party.

There are 111 such corporate accounts as of last month, with deposits estimated at around 2 trillion won.

The Financial Intelligence Unit has reportedly classified cryptocurrency trading as “highly dangerous” and prone to exploitation by criminals. It has obliged banks to implement self-monitoring measures.

Some banks that will undergo inspection already stopped issuing virtual accounts last month after the government suggested they establish a system to fend off money laundering attempts. Banks that have failed to carry out the obligation could face punitive measures ranging from fines to “shutting down accounts completely,” according to an official from the unit.

The government has been taking a draconian stance against cryptocurrency trading in Korea to cool down the market before the bubble bursts. On Dec. 28, it announced a regulatory measure banning the issuance of anonymous accounts. The government is working on a system to allow cryptocurrency transactions that would completely ban anonymous trading.

Despite the government’s continuous attempts, though, cryptocurrency prices in Korea, which exhibit a premium of nearly 25 percent compared to the global average, continue to rise, pushed up by events generating favorable investor sentiment.

The price of bitcoin started at 20 million won at Bithumb on Friday. The price took an upturn later in the day and reached as high as 25.9 million won shortly after Mark Zuckerberg, CEO of Facebook, made a remark on his Facebook page that was supportive of cryptocurrencies.

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