Wealthy and innovative South Korea ranks #1 in BloombergNEF’s 2020 national digitalization ranking1 and is a world leader in internet penetration, digital payments and R&D expenditure. Korean banks have surged ahead of their global counterparts in swiftly adopting open banking, digital payments and other disruptive technologies, and tech-savvy citizens have been quick to adapt. There is even a new buzzword—“untact”—to describe Korea’s increasingly digital culture. First developed by marketers in 2017, “untact” has become widely used in referring to contactless activities and services,2 and it is a central tenet of President Moon Jae-in’s platform.
South Korea’s rapid digitalization and strong financial policies were on full display amidst the height of the COVID-19 pandemic, which was skillfully managed by the government. A swift and tactical approach led to drastically fewer deaths and less severe economic effects than seen in other advanced countries. The GDP contracted by 1% in 20203 and economic recovery has been quick, with a GDP growth of 1.6% in the first quarter of 2021.4 In responding to the health crisis, the government successfully deployed digital solutions for public health measures, digital government, remote education and work,5 and Koreans flocked to digital payments and e-commerce.6
South Korea’s COVID-19 recovery strategy—the Digital New Deal—will further drive digital transformation in the economy and secure the country’s status as a tech hub. The 160 trillion won (approximately USD $133 billion) deal, announced in July 2020, seeks to completely reshape Korean economy and society, with a focus on bolstering job growth and “untact” industries like remote education and health.7 It allocates KRW 58.2 trillion (approximately USD $51 billion) towards the development of technologies like artificial intelligence, big data solutions and 5G networks over 2021-2025.
The 2021 digital agenda emphasizes financial innovation and digital finance, an investigation into the possible development of a central bank digital currency, developing the fintech ecosystem, financial consumer protection, strengthening cybersecurity and regulating crypto. Although digitalization in Korea promises to bring a trove of benefits to the economy and society, regulators must ensure that its rapid changes do not alienate the country’s aging population and other vulnerable groups.
Financial Regulatory Authorities
The Bank of Korea is the central bank of the Republic of Korea. The bank’s primary objective is to maintain the country’s price stability and it often targets inflation, especially consumer price inflation.
The Personal Information Protection Commission (PIPC), established under the country’s Personal
Information Protection Act (PIPA), is the primary data protection authority in South Korea. The independent commission develops policies and coordinates communication between government agencies regarding personal data processing. However, the Ministry of the Interior and Safety (MOIS) is charged with the enforcement of the country’s Personal Information Protection Act (PIPA).
The Financial Services Commission (FSC) is South Korea’s primary financial regulator.
Other Regulatory Authorities
The Korea Internet and Security Agency (KISA) is a statutory organization established by the Act on Promotion of Information and Communications Network Utilization and Information Protection (ETC)
that assists government agencies with data breach resolution and research. The agency also provides
advice on personal data protection security standards and policies.
Policy, Laws and Regulations
Bill Regulating Crypto Assets, 26 May 2021
The Act for Fostering the Virtual Asset Industry and Protecting Investors was introduced, which seeks to strengthen user protection and crack down on rampant hacking and fraud in the crypto industry. The bill would impose stringent entry barriers on entities seeking to operate virtual asset businesses, and would require all virtual asset businesses to join a virtual asset industry association.8 The bill follows another draft law aimed at regulating crypto. On 07 May 2021, the Virtual Assets Act bill was introduced, which similarly aims to protect investors. Both bills would establish various requirements on virtual asset exchanges, trustee companies and wallet companies regarding fair trade practices and accreditation, registration and reporting.
Bank of Korea’s Central Bank Digital Currency Platform, 24 May 2021
The Bank of Korea announced that it is seeking a technology supplier to build a test platform for a central bank digital currency. The pilot phase will test the use of a digital won in settlements and remittances through simulations of commercial banks and retail outlets. Although the central bank does not have concrete plans to issue a digital won, it aims to prepare for the possibility amidst a decline in cash transactions.9 The trial program will begin in August 2021 and run through June 2022.
Partial Amendment to Information Act Imposes Requirements on Virtual Asset Service Providers, 25 March 2021
The Partial Amendment to the Act on Reporting and Use of Specific Financial Transaction Information, passed by Korea’s parliament, the National Assembly, went into effect. The Partial Amendment, the first of its kind in Korea, allows for the operation of cryptocurrency exchanges by legitimizing virtual asset ownership and trading. Under the changes, virtual asset service providers (VASPs) must adhere to anti-money laundering requirements, including suspicious transaction reports, currency transaction reports and customer due diligence. VASPs shall conduct enhanced customer due diligence by requiring customer registration of an authorized Korean bank account, and VASPs shall report the registration to the Korean Financial Intelligence Unit (KoFIU) before September 2021. VASPs are also required to apply for an information security certificate with several prerequisites for approval, including the implementation of suitable technical solutions for sharing real-identity information with transaction counterparties. The Enforcement Decree, which also went into effect 25 March 2021, clarifies that “Qualified VASPs” per the Partial Amendment include cryptocurrency exchanges, custody service providers and wallet service providers.
Financial Consumer Protection Act Goes Into Effect, 25 March 2021
The Financial Consumer Protection Act (FCPA) streamlines previously fragmented statutes and regulations on the protection of financial consumers into one framework, expands the rights of financial consumers and imposes strict penalties for non-compliance. The act applies the six existing Sales Principles to a broader category of financial products, including financial products offered by banks, insurance companies, financial investment firms, P2P lending firms, registered private lenders, specialized credit finance companies and savings banks. The Sales Principles include the principle of suitability, the principle of adequacy, the duty to explain, the prohibition on unfair practices, the prohibition on misleading or unsolicited recommendations and the prohibition on false or exaggerated advertisements. The act also enables consumers to terminate a contract if an obliged entity violates a Sales Principle and withdraw from a subscription to financial products within a cooling-off period of seven to fifteen days. Should an obliged entity commit a major violation of the Sales Principles, punitive fines of up to 50% of revenue garnered through non-compliance may be imposed.
Announcement on Strengthening Cybersecurity, 18 February 2021
The Ministry of Science and ICT (MSIT) announced that it planned to allocate 670 billion won (approximately USD $607 million) towards strengthening national cybersecurity over 2021-2023. The ministry will collaborate with major cloud and data center companies to develop an infrastructure that can gather threat information in real time and notify companies, and provide security solutions to 1300 SMEs per year. Korean companies experienced a 2% rate of security information violations in 2020, which the ministry aims to reduce to less than 1.5% by 2030. The plan also intends to boost Korea’s ranking in the United Nations’ Global Cybersecurity Index, to number five by 2023.10
Financial Services Commission Announces Work Plan for Financial Innovation and Digital Finance, 28 January 2021
The Financial Services Commission unveiled a brief work plan for financial innovation and digital finance, which seeks to advance the fintech industry, promote online-based financial services and establish digital finance infrastructures. The three priorities hinge on key policy tasks, including the establishment of a digital sandbox for fintech startups, enhanced regulatory support, the improvement of rules on data privacy and ensuring the “stable operation of open banking services.” The FSC will also encourage the use of big data analytics and artificial intelligence in financial services.
Financial Services Commission Announces 2021 Work Plan, 18 January 2021
The Financial Services Commission announced its 2021 Work Plan, which outlines its key achievements for 2017-2020 and its four major policy tasks for 2021. The 2021 policy tasks aim to:
- “Maintain the COVID-19 financial support and manage potential risks
- Pursue new deal financing & promote green finance
- Promoting financial innovation and further advancement of digital finance
- Work on financial consumer protection and strengthen support for financially vulnerable groups”11
The plan seeks to future-proof key growth areas due to South Korea’s low birth rate and aging population, as well as establish regulatory and supervisory frameworks in response to emerging technologies. In supporting financial innovation, digital finance and the New Deal, the FSC outlines several key goals, including the increased usage of contactless financial services, expanded financial assistance to innovative firms, the establishment of a digital finance infrastructure and the accelerated growth of the fintech industry. Toward these ends, the FSC aims to allow credit card companies to provide open banking services; establish standards on the use of mobile-based, contactless authentication and identity verification systems; bolster investment and sandbox initiatives for fintech companies; support the development of AI-based financial services and promote the use of big data. As the digital economy rapidly grows and becomes more complex, regulators must ensure that financial and digital divides do not widen. The plan thus addresses financial consumer protection and heightened support for financially vulnerable groups, with goals to strengthen investor protection in capital markets, improve support programs and bolster management of “damage-prone” areas like crypto assets.
Proposed Amendment to the Electronic Financial Transactions Act Submitted to the National Assembly, 27 November 2020
The Proposed Amendment to the Electronic Financial Transactions Act (EFTA) was submitted to the National Assembly in a move to strengthen financial security and support the digitalization of the financial industry by simplifying and improving the existing law. The Electronic Financial Transactions Act aims to promote economic development by ensuring the safety and reliability of electronic financial transactions, and is applicable to electronic financial businesses like electronic funds transfer services. The Proposed Amendment to the EFTA implements the Digital Finance Transformation Plan, published in July 2020 by the Financial Services Commission, and streamlines the regulatory framework for several e-money and e-payment services, establishes infrastructure for digital financial transactions, strengthens protections for digital finance users and strengthens data security.11 The draft law also aims to safeguard and promote the continuity, scalability and stability of the open banking system.12 It is expected to pass in 2021.
1. “South Korea, Singapore, Germany Lead BNEF Ranking of Top Digitalization Markets.” BloombergNEF, 24 September 2020. https://about.bnef.com/blog/south-korea-singapore-germany-lead-bnef-ranking-of-top-digitalization-markets/.
2. Lee, Julie Yoonnyung. “Digital technology has helped South Koreans cope with the pandemic. But the elderly have been left behind in the new contact-free era.” BBC, 05 August 2020. https://www.bbc.com/worklife/article/20200803-south-korea-contact-free-untact-society-after-coronavirus.
3. Pesek, William. “South Korea Shows OECD How It’s Done In Covid-19 Era.” Forbes, 29 January 2021. https://www.forbes.com/sites/williampesek/2021/01/29/south-korea-shows-oecd-how-its-done-in-covid-19-era/?sh=418e7e172ea8.
4. Kim, Sam. “Korean Economy Joins China in Surpassing Pre-Pandemic Peak.” Bloomberg, 27 April 2021. https://www.bloomberg.com/news/articles/2021-04-26/south-korea-s-economy-grows-more-than-expected-on-investment.
5. “Learning from Korea’s Digital Response to COVID-19.” World Bank, https://olc.worldbank.org/content/learning-korea%E2%80%99s-digital-response-covid-19.
6. “COVID-19 accelerates e-commerce growth in South Korea, says GlobalData.” GlobalData, 09 October 2020. https://www.globaldata.com/covid-19-accelerates-e-commerce-growth-south-korea-says-globaldata/.
7. Kim, Sam. “South Korea Doubles Spending Plan for ‘New Deal’ to Reshape Economy.” BNN Bloomberg, 14 July 2020. https://www.bnnbloomberg.ca/south-korea-doubles-spending-plan-for-new-deal-to-reshape-economy-1.1464887.
8. Im, Felix. “The South Korean parliament has begun discussing a number of bills specifically addressing crypto.” Coindesk, 07 June 2021. https://www.coindesk.com/south-korean-parliament-discusses-crypto-bills-for-first-time.
9. Kim, Cynthia. “S. Korea's c.bank moves to develop pilot digital currency.” Reuters, 23 May 2021. https://www.reuters.com/business/finance/s-koreas-cbank-moves-develop-pilot-digital-currency-2021-05-24/.
10. “S. Korea to spend 670 bln won on cyber security by 2023.” Yonhap News Agency, 18 February 2021. https://en.yna.co.kr/view/AEN20210218006100320.
11. “FSC Announces 2021 Work Plan.” Financial Services Commission, 19 January 2021. https://www.fsc.go.kr/eng/pr010101/75201.
12. Cho, Ik Hwan. “In review: digital markets, funding and payment services in South Korea.” Lexology, 27 April 2021. https://www.lexology.com/library/detail.aspx?g=9f88650c-d5b1-4d19-86c6-96075c1b639e.
13. Cho, Ik Hwan et al. “Proposed Amendment to Electronic Financial Transaction Act to Transform the Korean Financial Industry.” Kim & Chang, 25 March 2021. https://www.kimchang.com/jp/insights/detail.kc?sch_section=4&idx=22885.
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Last updated: November 2021