The Foreign Exchange Transactions Act, Foreign Exchange, and Means of Payment
The Foreign Exchange Transactions Act is a law that regulates foreign exchange. The term "foreign exchange" refers to means of international payment, as well as securities, derivatives, and claims in foreign currency. "Means of payment" generally refers to money or other instruments that can be used in place of money to purchase goods or pay debts, and "means of international payment" are means of payment that are either denominated in foreign currencies or can be used in foreign countries. Common examples include foreign currencies such as the U.S. dollar (USD), euro (EUR), and Chinese yuan (RMB). Prepaid payment instruments that can be used overseas, such as Apple Pay and Alipay, are also considered means of international payment.
The Foreign Exchange Transactions Act primarily governs foreign exchange transactions. It reflects Korea's painful experience of applying for an IMF relief loan due to the rapid outflow of foreign currency. The Act classifies foreign exchange transactions as "foreign exchange affairs," which can be conducted only by licensed business operators approved by the regulatory authority. Foreign exchange transactions between individuals are, in principle, prohibited.
Why Cryptocurrency Cannot Be Recognized as a Means of Payment Under the Foreign Exchange Transactions Act?
Cryptocurrencies are not designated as a means of payment under the Foreign Exchange Transactions Act. While there has been ongoing discussion about their inclusion, no meaningful progress has been made. If cryptocurrencies were officially recognized as a means of payment, engaging in cryptocurrency trading would require a separate license in addition to registration as a virtual asset service provider. Transactions between individuals would also be subject to regulation, as such transactions would be classified as foreign exchange transactions. Why, then, have the foreign exchange authority known for their stringent regulatory stance not taken swift action to regulate cryptocurrencies? The answer lies in the decentralized nature of cryptocurrencies, which fundamentally differ from centralized currencies such as the U.S. dollar.
The cross-border movement of the U.S. dollar can be tracked as long as regulatory authorities monitor key points in the flow. This is because such transfers must either pass through the SWIFT network (the international interbank communication system) or involve physical cash passing through airport customs.
However, cross-border transfers of cryptocurrency are conducted directly between individuals. As long as the sender knows the recipient's digital wallet address, such transfer can occur without involving any bank. The foreign exchange authority has no means of identifying how much cryptocurrency is transferred via digital wallets held by individuals residing in Korea. They are well aware that applying the same regulatory framework to cryptocurrency as to the U.S. dollar would result in a regulatory burden it cannot feasibly manage.
What is a Stablecoin?
A stablecoin is a type of cryptocurrency whose value is pegged one-to-one to a fiat currency, such as the U.S. dollar or Korean won. For instance, USDT, one of the most widely used stablecoins, is designed to maintain a fixed value of one U.S. dollar per token. Since its value is equivalent to that of the U.S. dollar, it is not used as an investment asset like Bitcoin, but is instead used in practice as a means of payment due to its price stability. But how is the value of stablecoins secured when they are issued by private entities? In the case of USDT, the issuing company possesses safety assets in an amount equivalent to the stablecoins it has issued. The GENIUS Act, recently enacted in the U.S., recognizes the legal status of stablecoins while also requiring issuers to hold an equivalent amount in the U.S. dollars or U.S. government bonds to fully collateralize their total issuance.
Currently, over 160 billion dollars' worth of USDT and 64 billion dollars' worth of USDC are in circulation and use worldwide. In Korea, a stablecoin was first listed on a domestic cryptocurrency exchange in late 2023. However, even before that, stablecoins were already being traded between individuals online, much like secondhand goods. Initially, stablecoins were primarily used as a means of payment for investing in foreign virtual assets, as they were required to purchase Bitcoin on overseas exchanges such as Binance.
Later, stablecoins began to be used as a means of payment in international trade. The financial sanctions imposed on Russia following the outbreak of the Russia-Ukraine war served as a direct catalyst for their broader adoption. As it became impossible to settle payments with Russia through traditional banking channels, businesses turned to stablecoins, whose value is equivalent to the U.S. dollar, as an alternative payment method. In particular, companies exporting second-hand vehicles to Russia frequently received payments in stablecoins.
Do Dollar Stablecoins Constitute "Foreign Exchange" Under the Foreign Exchange Transactions Act?
As mentioned above, the term "foreign exchange" includes not only means of international payment but also claims in foreign currencies.
Given that dollar stablecoins have economic value and usage equivalent to the U.S. dollar, could they be regarded as a means of international payment, unlike other cryptocurrencies? According to the foreign exchange authority, the answer is no. This is because stablecoins are still cryptocurrencies and therefore inherently decentralized. As long as this decentralized nature persists, it is practically impossible for the foreign exchange authority to classify stablecoins as a means of international payment and regulate them in the same manner as the U.S. dollar.
Then, could dollar stablecoins be considered "claims in foreign currencies"? From a legal interpretation standpoint, such a classification may be deemed possible, as stablecoins such as USDT or USDC possess an important feature not found in other cryptocurrencies: the right to recourse. For instance, the issuer of USDT grants holders the right to exchange USDT for U.S. dollars at a one-to-one ratio at any time. To ensure it can honor such requests, the issuer is said to maintain dollar-denominated assets exceeding the total value of USDT issued. Therefore, dollar stablecoins may be viewed as embodying a right to claim payment of a sum of money denominated in a foreign currency (i.e. U.S. dollars), and in other words, they may be understood as having the characteristics of claims in foreign currencies.
If dollar stablecoins were classified as claims in foreign currencies, transactions involving them would be subject to the same regulatory framework as foreign exchange transactions. In such cases, only business operators licensed under the Foreign Exchange Transactions Act would be permitted to conduct these transactions, while peer-to-peer trading would be strictly regulated. The foreign exchange authority, however, has adopted a reserved stance on treating dollar stablecoins as claims in foreign currencies. This position is based on practical considerations similar to those underlying the decision not to recognize stablecoins as a means of international payment.
Do Stablecoins Raise Further Issues under the Foreign Exchange Transactions Act?
Although the foreign exchange authority does not currently regard stablecoins as foreign exchange, this does not mean that activities involving stablecoins are irrelevant to the Foreign Exchange Transactions Act.
The Foreign Exchange Transactions Act does not regulate only "foreign exchange transactions." It also explicitly applies to payments and receipts between the Republic of Korea and foreign countries. Under the Act, payments to or from foreign sellers or buyers must be settled through a bank, referred to as a "foreign exchange agency" under the Act. Any foreign payment settled without going through such a bank is subject to regulation, such as a prior reporting requirement.
Settling foreign payments using dollar stablecoins constitutes a form of foreign payment that bypasses banks. Under the Foreign Exchange Transactions Act, such payments are subject to prior reporting. However, the Bank of Korea does not currently accept such reports. As a result, there is no viable means to file a prior report, making it effectively impossible to comply with the reporting requirement. This makes settling foreign payments using dollar stablecoins a violation of the Foreign Exchange Transactions Act.
How Many People Would Find It Justifiable to Punish the Use of Stablecoins for Foreign Payments When Prior Reporting Is Not Even Accepted?
In summary, dollar stablecoins are not yet regarded as foreign exchange under the Foreign Exchange Transactions Act. Nevertheless, settling foreign payments using dollar stablecoins is highly likely to be considered illegal under the current law.
However, it is unlikely that the Act will continue to treat such transactions as unlawful. While the legal system may lag behind reality, it cannot ignore it altogether. The use of dollar stablecoins in Korea is expected to increase exponentially, as they allow for faster, lower-cost cross-border payments compared to traditional bank transfers. The United States has officially recognized dollar stablecoins, and global platform companies like Amazon and Meta are expected to issue their own. In the future, Korean consumers may increasingly use dollar stablecoins such as USDT in everyday transactions instead of the Korean won.
If the legal system requires prior reporting but refuses to accept such reports, and then punishes individuals for using stablecoins to make foreign payments without reporting, how many people would genuinely find that justifiable?
If the Foreign Exchange Transactions Act is revised while maintaining its current framework, it is highly likely that the use of dollar stablecoins for settling foreign payments would be permitted as an exception to the prior reporting requirement. However, such an exception would likely apply only to business operators licensed under the Act. In this way, the foreign exchange authority would effectively manage all foreign payment settlements made using dollar stablecoins by overseeing only the licensed operators.
It has been more than 20 years since the current framework of the Foreign Exchange Transactions Act was established. Although the regulations have been gradually relaxed in the name of deregulation, the overall structure has largely remained unchanged. However, the new reality that stablecoins are expected to bring is one to which the existing legal framework may no longer be applicable. This is why close attention should be paid to how the Act evolves in the coming years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
