Bithumb to Block Crypto Withdrawals to Unverified Private Wallets

Bithumb to Block Crypto Withdrawals to Unverified Private Wallets

On the 27th of January, 2022, Bithumb, one of the top crypto exchanges in South Korea made a surprising announcement. The exchange declared that users will no longer be allowed to make Cryptocurrency Exchange withdrawals to unverified private crypto wallets.  

During the announcement, Bithumb pointed out that it will be the second of the four leading crypto exchanges in South Korea to implement this new policy. Coinone was the first crypto exchange to enact this new policy and now Bithumb seems to be following suit. 

Bithumb cited the need to secure investors' funds and curb the use of crypto for illegal operations as a reason for the new policy. In the quest to guard against money laundering and terrorist funding via crypto, Bitjumb users will have to register their third-party wallets with the exchange. Users will have to submit their personal information like email address, full name, and phone number. Noncompliance will result in such a user being unable to withdraw funds from the exchange. 

Meanwhile, the exchange platform has noted that it will approve withdrawals to external crypto wallets and enforce strict KYC verification. Examples of such wallets include Binance.US, Bitstamp, Bybit, and On the contrary, wallets ut stringent KYC processes like Trezor, Ledger, and MetaMask will be unusable for Bithumb users. 

This policy change was announced just a month after Coinone declared that it has stopped all withdrawals to unverified enter crypto wallets. 

Partner Bank forced policy change

According to reports from local news media, Bithumb was under a lot of pressure from Nonghyuo Bank, its partner bank, to execute the policy change. The bank was interested in making sure the exchange complies with the Travel Rule enacted by the FATF. The rule was developed to allow financial institutions to learn the identity of users (both receiver and sender) across borders. 

Based on reports, the bank actively requested that Bithumb block all private crypto wallets without a strict KYC process. Partner banks can have a strong influence on crypto exchanges thanks to regulation. In South Korea, every crypto platform that lists any Korean Won (KRW) trading pair is compelled to have a local partner bank. These banks are then charged with the KYC responsibility of the crypto exchange platform. The banks issue a real-name bank account or every client of a crypto exchange. 

Client's having a real name bank account guarantees that the individual can request fiat withdrawal from the exchange. This policy is promoting crypto exchanges to comply with the Travel Rule which has a deadline of March 25, 2022.

So far, Korbit and Upbit exchanges have not announced any plan for policy changes as regards private crypto wallets. The exchanges still have until the 25th of March which the government thinks is long enough for exchanges to comply with the rule. 

Based on the information provided by Staista, Upbit managed about 75% of local trading volume while Bithumb managed around 13%. Non-compliance with the rule may attract stricter AML and CTF monitoring. 

Exchanges without qualifications face closure

Several innovative and creative steps have always been executed by Korean regulators to put an end to the suspicious crypto activity. For example, every crypto exchange in South Korea must fulfill several requirements such as internal controls, data maintenance, execution of KYC to validate client's identity, and reporting illegal activities.  

Korea's crypto exchanges that fulfilled the legislative deadline are less than 50%. Nonetheless, they are still faced with challenges like the inability to convert crypto assets into Korean won and numerous hacks. Apart from this stringent rule, exchanges are still required to earn a certificate of security from the ISMS (Information Security Management System)

Experts in the industry have already predicted that over 30 exchanges will stop operation or minimize their services. Operations will have to be ceased or minimized if they fail to comply with the country's AML body. Exchanges that are also unable to get real-name bank accounts for their clients through a commercial bank will also have to cease operation. 

Crypto exchanges that are in partnership with a local bank and can issue real-name accounts still have one more step to take. They are also compelled to earn a license from the government's Financial Intelligence Unit, a top financial regulator in the country.