SEOUL—South Korean regulators said they have started on-site inspections of the country’s large commercial banks, marking a change of tack in authorities’ efforts to clamp down on cryptocurrency speculation in one of Asia’s hottest bitcoin markets.
South Korea’s lead securities regulator said Monday that it is inspecting six of the country’s biggest financial institutions to monitor their compliance with anti-money-laundering obligations related to cryptocurrency trading.
The inspection comes 10 days after South Korea banned the use of unidentified virtual accounts for trading digital currencies. It is a slightly different approach from regulators’ previous attempts to regulate entities in the cryptocurrency industry largely by dealing with them directly—a difficult task since they aren’t generally covered by existing laws.
“We’re reviewing all possibilities under the current law to take action,”
head of South Korea’s Financial Services Commision, said in a press briefing Monday. Mr. Choi said the regulator has drafted a separate policy on cryptocurrency trading that is under discussion at the National Assembly.
While the commercial banks don’t process cryptocurrency trades themselves, the bitcoin exchanges create “virtual accounts” at the major commercial banks for each of their clients. Virtual accounts are bank accounts used by investors to hold or receive fiat money when they buy or sell cryptocurrency.
Mr. Choi said the financial watchdog was also looking to monitor how banks verify the identity of virtual account holders, warning investors and banks to exercise caution in dealing with cryptocurrencies.
Findings from the bank inspections will be used to determine whether to suspend banks from providing virtual accounts, Mr. Choi said.
He also suggested that commercial banks may be facilitating illegal activities by not actively monitoring these virtual accounts.
“There is growing concern that banks, which should actively act as gatekeepers to prevent the distribution of crime and illegal funds, are aiding and encouraging them,” Mr. Choi said.
The government’s concern is not unwarranted. Last month, a South Korean cryptocurrency exchange filed for bankruptcy after it was hacked for the second time. The Wall Street Journal reported that South Korean investigators are looking into North Korea’s possible involvement in the heist.
South Korea has placed a high priority on stamping out criminal activities tied to digital currencies. The global craze over Bitcoin has been particularly fervent in South Korea, where the virtual currency is priced consistently higher than in other countries. The arbitrage gap—dubbed the “kimchi premium” in honor of the country’s traditional fermented cabbage dish—widened this weekend to some 40%.
Bitcoin’s price in South Korea was 50% higher than in other markets at one point over the weekend, according to Park Nok-sun, an analyst at NH Investment & Securities in Seoul. “In the past, people sold their coins when the price reached this high, but there is just so much optimism at the moment that no one is selling,” Mr. Park said.
It remains unclear how much the government’s additional measures would impact the bitcoin market. “Should the government ban banks from setting up virtual accounts, it’ll affect the flow of new assets, but not affect money that has already entered the market,” said Shon Ga-ram, a lawyer at HMP Law, a Seoul-based law firm.
The six banks under inspection are South Korea’s NH Bank,
Shinhan Bank, KB Kookmin Bank, Woori Bank and Korea Development Bank.
Write to Eun-Young Jeong at Eun-Young.Jeong@wsj.com